Olam International - Expanding into rice and wheat in Nigeria (DBSV)

HOLD S$2.40 STI : 2,773.36

Price Target : 12-Month S$ 2.35

Olam announced on 1 and 2 Dec11 that it intends to expand its rice and wheat businesses in Nigeria, funded by a combination of internal funds and borrowings.

Rice

Olam will invest US$49.2m to set up a 6,000 ha greenfield, fully integrated, mechanised and irrigated paddy farming and rice milling facility in Nasarawa State, a major rice growing region in Nigeria. The paddy fields will be planted in phases between FY2013 and FY2016. Peak production is expected to be 60,000 MT, which will translate into 36,000 MT of milled rice. These will be sold through Olam's network of distributors and dealers across Nigeria.

Olam sees this as an attractive investment (forecast project IRR is 28%) due to the following:

1. large Nigerian market – consumes 5.5m MT of rice p.a. (with 1.9m MT imported);

2. imported rice attracts high duties and costs; and

3. favourable government policies to support local production and enhance food security.

Wheat

Olam's Nigerian subsidiary, Crown Flour Mills (CFM) is investing US$50m to:

1. build another semolina mill and flour mill in Lagos, each with 250 TPD (tons per day) capacity;

2. construct a 250 TPD flour mill in Warri to raise total installed capacity from 1,630 TPD to 2,380 TPD; and

3. increase silo storage facilities by 18,000 MT in Lagos and Warri.

The construction and commissioning of the new mills and storage facilities is expected to take 17 months. The project is estimated to deliver 20% IRR. The expansion at CFM will enable Olam to grab a larger share of the growing Nigerian flour market, and give the flexibility to produce all types of flour for bread, noodle, pasta, and semolina.

These are positive developments for Olam, given the attractive returns. But since they are relatively small investments, we will only update our numbers after the release of 2QFY12 result early next year. Maintain Hold rating and S$2.35 TP.