Olam International - Acquisition of Indian sugar mill (DBSVickers)

HOLD S$2.59 STI : 2,885.26

Price Target : 12-Month S$ 2.55

Details of the acquisition

Olam announced that it had agreed to acquire 100% of Hemarus Industries Limited (HIL) for EV of US$73.8m comprising US$8m cash payment and debt of approximately US$66m.

HIL assets consists of:

1. Recently commissioned sugar milling facility with operating capacity of 3,500 MT crush per day (TCD) in Kohlapur district of Maharashtra State, India

2. A 20MW co-generation facility

3. License to build a 45 kilo litre per day (KLPD) ethanol facility

4. License for additional 3,500 TCD sugar mill in Belgaum district (with 20MW co-generation facility)

5. 210 acres of land to accommodate expansion of sugar mill capacity, ethanol facility and new bio compost plant.

Acquisition rationale

Olam plans to invest a further US$6.6m to expand HIL's sugar milling capacity to 5,000 TCD by next year. The group believes the acquisition is in line with its stated strategy of acquiring milling facilities in regions with a comparative cost advantage as well as provides exposure to the growing Indian/Asian sugar demand. The acquisition will position Olam to achieve its goal of increasing its crushing capacity to between 2.0 and 2.5m MT p.a. Combined with GSIL's 400k MT p.a. capacity, this acquisition will bring Olam's crushing capacity to 1.45m MT p.a. and to 1.9m MT p.a. when expanded next year.

Insignificant impact on FY12F-14F earnings

The transaction is expected to be EBITDA accretive from the 1st year and earnings accretive from 2nd year post consolidation. By Year 5 on a steady state basis, the project will generate revenues of between US$90-100m, EBITDA margin of between 25-27% and ROE of 32%. In our estimates, the proposed acquisition of HIL will be 3% accretive to our FY16 numbers.

Hold rating maintained

As the transaction is still subject to customary closing conditions and has a minor impact on our earnings forecasts, we will not be changing our numbers at this point in time. Our Hold rating is maintained with TP of S$2.55.