Olam International Ltd (OCBC)

Maintain BUY
Previous Rating: BUY
Current Price: S$2.75
Fair Value: S$3.22

Maintain BUY with new S$3.22 fair value

Equity funding raise exercise. Olam International Limited had recently announced an equity fund raising exercise to raise around S$740m of gross proceeds; this via three separate tranches, including a pro-rata and non-renounceable preferential offering of 97.3m new shares at S$2.56 each to entitled shareholders on the basis of one preferential share for every 22 existing shares. The offer prices of S$2.60 (for institutional investors and Temasek Holdings) and S$2.56 represented discounts of 8.1% and 9.5% to the pre-halt price of S$2.83. Olam intends to spend half of the proceeds on potential acquisitions in the future; 30% on capex; and 20% on general corporate purposes.

Modest recovery in share price. But because of the potential dilution in EPS (earnings per share) due to the 13.4% increase in existing share capital, Olam's stock price took a hit when it resumed trading on Tue (7 Jun), dropping by as much as 6.0%, before recovering somewhat to end 3.5% lower. And the stock continued its recovery yesterday, ending some 0.7% higher at S$2.75, despite a weaker overall market (STI down 0.3%); this suggests that the market is now looking beyond the EPS dilution and towards potential M&As and its future prospects. We believe that the latest fund raising exercise should also reduce near-term overhang of another fund raising exercise.

Revising FY11 and FY12 estimates. In the wake of its better than - expected 3Q FY11 performance, the latest share placement/offer, as well as other changes in assumptions following the change in analyst coverage, we revise our FY11 and FY12 estimates. As a recap, Olam posted a 74.7% YoY and 17.6% jump in revenue to S$4,735.7m in 3QFY11; while reported net profit climbed 42.5% YoY (down 12.5% QoQ) to S$127.3m (core around S$104.6m). For 9MFY11, revenue rose 53.1% to S$11,212.4m, while reported net profit climbed 13.2% to S$302.4m; estimated core earnings came in at around S$219.0m. As such, we now expect Olam to post FY11F revenue of S$13,767.3m and a net profit of S$369.4m. For FY12, we expect revenue of S$15,605.1m and net profit of S$408.5m.

Revising fair value to S$3.22. We are also revising our fair value from S$3.53 to S$3.22 (now based on 19x FY12F EPS). As there is still an upside of some 17% from here, we maintain our BUY rating. Other potential catalysts include the financial close of the Urea Manufacturing Project in Gabon (which we have not included any contributions yet) and more earnings accretive M&As. Key risks include continued volatilities in commodity prices and foreign exchange rates.