Event
Olam this month announced positive newsflow in the form of an important milestone for its Gabon fertiliser project, as well as the acquisition of sugar milling facilities in India for US$63.8m. With the stock up 8% in the past two weeks alone (vs FSSTI 1%), we believe its valuations are no longer compelling in the light of the current global economic uncertainties. Downgrade to HOLD.
Our View
Olam acquired a 3,500-tonne-per-day sugar milling facility and related assets in India for a total consideration of US$73.8m and intends to invest a further US$6.6m (total US$80.4m) to expand capacity to 5,000 tonnes per day. Book value of the assets is approximately US$70m. We expect this to be the first in a series of sugar mill acquisitions, with management having articulated its interest in this space at the company’s latest results briefing.
The successful completion of the gas due diligence for the Gabon Fertiliser project is a major milestone, given that its feasibility largely hinges on whether the Republic of Gabon can provide this low-cost feedstock to the plant over the 25-year period. When fully operational, this project will probably account for some 15% of its US$1b net profit target for FY Jun16.
Nonetheless, we believe these developments are already largely within the market’s expectations. The stock currently trades at 13.5x FY Jun12F, which is lower than its historical average of 24x. However, as we said previously, we expect the stock to de-rate to levels closer to its peers, given more earnings contributions from its upstream/midstream assets.
Action & Recommendation
Our target price of $2.79 remains pegged to 15x FY Jun12F. The stock traded to a trough of 7x during the 2008-09 global financial crisis. We are mindful of the current global economic uncertainties and believe the recent share price run-up represents a good opportunity for investors to take profits off the table. Downgrade to HOLD.
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