Olam International: Sustaining shareholder value

Yet another acquisition. Olam International had today announced that it had successfully bid for tomato processing assets of SK Foods LP and its wholly owned subsidiary RHM Industrial/Specialty Foods Inc. through a bankruptcy court auction held on 24 June 2009 in Sacramento, California. The bankruptcy court had also approved the purchase agreement made by Olam's wholly owned subsidiary, Olam Tomato Processors Inc. on 26 June 2009.

Distressed asset. The purchase amount is US$39 million (clean, with no associated debts or other liabilities). The bankruptcy court has stipulated a closing period of 11 days from the date of its approval, and hence the acquisition is expected to close on or before July 10, 2009.

Earnings accretive by FY12F. The acquisition represents an expansion in Olam's Spice & Dehydrates business with high degree of customer, channel and cost sharing; and adds to previous acquisitions of Universal Blanchers, KFI and the Firebaugh vegetable dehydration facility. Olam does not expect this acquisition to be earnings accretive in FY10; but hopes to achieve steady state revenues of US$200 million and EBITDA margins of 12-13% from FY12.

Buy call maintained. We are positive on the purchase, as it shows the group's sustained ability to create shareholder value. Our buy call is reiterated; while our TP is raised slightly to S$2.60, based on 18.0x CY10F PE.

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Wilmar - Extended growing season

Initiate with OW, Jun-10 PT of S$5.80: Wilmar International Limited has transformed itself from a palm oil trading firm into an agricultural commodities conglomerate. Its over 500,000 hectares of plantation land bank, extensive processing facilities and wide distribution network position it favorably across the agribusiness supply chain, in our view.

China business outlook: The potential listing of Wilmar’s China business would help fund further growth in China. We estimate the IPO could add 8-53 cents to Wilmar’s share price (we assume 24 cents in ourSOTP valuation, from the potential listing of 30% of the China business at 18x FY10E P/E). Management targets potential synergistic M&As. We estimate the stock deserves a premium to its plantation/supply chain peers which are trading at c.12x FY10E P/E.

Consumption growth in emerging markets: Wilmar’s presence in China makes it more than a pure plantation stock. Its high-volume oilseeds and grains business caters to rising soybean meal demand in China. We estimate soybean meal consumption in China to rise by 6% Y/Y next year. Wilmar’s consumer pack oils remain leading brands in China, Indonesia, and India. We believe this business is comparable to branded China consumer names trading at c.18x FY10E P/E.

Favorable CPO price outlook: Increasing signs of an El Nino return put CPO production at risk. The stock-usage ratio is expected to reach 13.7% by Sep-09—the lowest since Sep-03. Furthermore, tight soybean supply from crop losses in South America provides price support.

Valuation, PT and risks: Our Jun-10 PT is based on sum-of-the-parts. We value Wilmar’s core business on a two-stage DCF (WACC of 7.5% and growth rate of 2.5%), and add 24 cents from the potential Chinese business listing. Our PT equates to 14.7x FY10E P/E. A key downside risk to our PT is a higher-than-expected output depressing CPO prices, while we see an upside risk from a possible higher valuation multiple than the 18x FY10E P/E which we have assigned to the China business.

Golden Agri-Resources - Adjusting for rights issue

Golden Agri share price will go ex of its proposed rights issue today. To recap, Golden Agri has proposed a fully underwritten 17-for-100 rights with free detachable warrants at S$0.18 per share. We are raising our net profit forecasts by 1-2% for FY09-FY11 to account for the net interest savings from the US$215m proceeds raise from the rights issue. However, we lowered our FY09-11 EPS by 8-13% due to the enlarged share base. Our target price is cut from S$0.48 to S$0.43 to account for the dilution from the rights issues. However, we are upgrading our call on the stock to Trading Buy from Neutral as valuation for the stock is now more attractive following the stock underperformance against the Singapore market. Since our last update on 5 June 2009, Golden Agri's share prices have tumbled 11% against the decline in the market of 2.4%. Key re-rating catalysts are potential earnings-enhancing M&A and lower than expected operating costs.

Olam: Share price has risen beyond fair value

We are downgrading Olam from NEUTRAL to SELL. With Temasek taking a 13.8% stake in Olam (pending Olam shareholders' approval) and the additional capital providing scope for more acquisitions, we have raised our target price from S$1.83 to S$1.90. However, the recent surge in Olam's share price has made it more susceptible to possible weakness in global equity markets.

Temasek to take a 13.8% stake in Olam. On 1 Jun 09, Olam announced the issue of 273.5m new shares at S$1.60 each to raise gross proceeds of S$437.5m. The shares will be issued to wholly owned subsidiaries of Temasek. These new shares represent 13.8% of the enlarged issued capital of Olam. Olam indicated that 80-100% of the proceeds will be used to finance new capital expenditures and 0-20% for general corporate purposes. We spoke to management who indicated that Olam would consider all products that could enhance its margin, and acquisition of plantations is also possible. Olam has a adjusted net debt to equity of 0.83x as of Mar 09, and this will fall to a proforma 0.31x after the placement to Temasek.

Olam share price is now 13% higher than on 29 May (last trading day prior to new share issue announcement). Whilst the additional funds will provide Olam with more muscle to make acquisitions, we believe the general weak global economies will limit organic earnings growth.

Our Olam fair value is raised to S$1.90. With the placement, debt levels will fall and equity holders will enjoy a larger share of Olam's value. However, the improvement is partly offset by our DCF model factoring in a higher WACC of 7.2% (from 7.0% previously), which is attributed to a higher risk free rate of 2.73% (previously 2.12%) and market risk premium of 7.4% (previously 6.7%).

Wilmar: Resilient integrated agri-business model

Resilient integrated agri-business model. Wilmar International Limited (Wilmar) is one of Asia's leading agri-business group, where its business activities include oil palm cultivation, edible oils refining, oilseeds crushing, consumer pack edible oil processing and merchandising, among others. And over the years, it has established a resilient integrated agri-business model which not only captures the entire value chain of the agricultural commodity processing business, but also enables it to extract margins at every step of the value chain, resulting in significant operational synergies and cost efficiencies.

Well diversified markets. Headquartered in Singapore, its operations are located in over 20 countries across four continents, with a primary focus on Indonesia, Malaysia, China, India and Europe. We understand that Wilmar currently controls about 25% of the world's CPO (crude palm oil) refining capacity and 25% of China's soy bean crushing capacity. Wilmar also has a 40% share of the global CPO sales and nearly 50% share of China's consumer pack edible oil market. In addition, it is also one of the largest edible oils refiners and a leading producer of consumer pack edible oils in India. It also intends to develop an integrated agri-business with experienced partners in West Africa.

Potential listing of China operations. Given its extensive network and business in China, Wilmar has plans to spin off its business there with a primary listing either in Hong Kong or China. According to management, it plans to float 20-30% of its China business, but did not rule out selling more. Benefits of the move include unlocking value for existing shareholders, the ability to expand into other areas with the China listco etc. We believe that it is a good move for the reasons mentioned by the company and we also see the potential spin-offs involving its other sizeable operations overseas.

Initiate coverage with BUY and S$5.64 fair value. Despite its integrated agri-business model, Wilmar remains subject to the volatile fluctuations in the prices of vegetable oil like soy bean and CPO, which remains a key risk for us. But given that cooking oil is a necessity and demand should be fairly inelastic, we believe it may be less of an issue for more downstream plays like Wilmar than pure plantation plays. As such, we initiate coverage on the stock with S$5.64 fair value (based on 18x blended FY09/10 PER) and a BUY rating.

Noble Group : Marginal dilution from placement

Placement to have minimal dilutive impact. Noble Group Ltd (Noble) has announced a placement of 84.7m new shares at S$1.52 per share. The new shares will enlarge the group's existing share base by a marginal 2.6%, and will raise net proceeds of US$86.2m, which will be used for general corporate purposes. Concurrent with the placement, major shareholder Noble Temple Trading Inc (in which Noble's CEO Mr Richard Elman has a deemed interest) will place out 36.3m vendor shares, representing 1.1% of Noble's issued capital. The placement shares have been priced at a 2.5% discount to the weighted average price from 11 to 12 May 09 prior to trading halt. Dilutive impact from the new share placement is insignificant - our FY09F EPS has been trimmed to 11.3 US cents from 11.6 US cents. NAV is expected to increase to 59 US cents from 58 US cents.

No pressing need for additional funds. Looking at its strong balancesheet, Noble has no urgent need for additional funds. The group's adjusted net cash position (cash and readily marketable inventories less debt) improved to US$376m in 1Q09 from US$358m in 4Q08. Available credit facilities remained ample at US$4.2b. According to management, funds raised from this placement will be used for general working capital purposes, and will come in handy should commodity prices rise. We reckon that additional funds will also strengthen Noble's position for future acquisitionopportunities, such as its ongoing bid for Gloucester Coal Ltd, which could cost the group US$281.4m. In addition, this placement, which was largely targeted at institutional investors, will serve to diversify the group's institutional shareholder base.

Reduce to HOLD on valuations. Noble has demonstrated its ability to manoeuvre harsh operating conditions by delivering a strong set of 1Q09 results with volume growth seen across all its segments. Nevertheless, its outlook remains highly dependent on the recovery of the real economy, which remains unconvincing at this juncture. In view of the recent rally, we are adopting a more cautious stance on the stock. We have tweaked our fair value estimate to S$1.62 (from S$1.66) to account for dilution. Given the limited upside to our fair value estimate, we reduce our rating to HOLD.

Straits Asia Resources: Heating Up

Coal price trends upward. Underpin by recent roundup in oil price, we believe that coal price is set to follow suit as demand for coal remains strong. Our channel checks with major coal producers in Indonesia suggest that demand for coal is still robust, as the increase in output so far in 2009 has been absorbed by the market. Latest coal price at US$71.9/ton is 15% higher than its lows back in March 2009.

Main beneficiary of strengthening coal price. SAR's FY09 earnings will remain strong, driven by improvement in sales volume (+17% y-o-y) and sales price (+13% y-o-y). SAR has sold and priced 6.5mn tons of its FY09 coal deliveries at US$114/ton, thus cementing our optimism that it will achieve a blended average sales price of US$78/ton for FY09.

On track expansion plan. SAR management is continuing its effort to boost production by enhancing its infrastructure capacity. The company aims to achieve a capacity of 20mn tons p.a. and currently the installed infrastructure can attain production of 19mn tons p.a.

BUY with TP of S$2.26. Our target price was derived using the DCF methodology with WACC assumption of 11.1%, risk premium 5% and risk free rate of 9.5%. Reiterate BUY.

Timetable of the Rights Issue for Golden Agri-Resources

Golden Agri-Resources Ltd r proposed underwritten renounceable rights issue of up to 1,763,739,384 new ordinary shares in the capital of the Company (“Rights Shares”) at the issue price of S$0.18 for each Rights Share, on the basis of 17 Rights Shares for every 100 existing ordinary shares.

Shares trade ex-rights : 25 June 2009 from 9.00 a.m.
Books Closure Date : 29 June 2009 at 5.00 p.m.
Despatch of the OIS and application forms : 2 July 2009 and letters to Entitled Shareholders
Commencement of trading of “nil-paid” Rights : 2 July 2009 at 9.00 a.m.
Last date and time for trading of “nil-paid” Rights : 10 July 2009 at 5.00 p.m.
Last date and time for splitting Rights : 10 July 2009 at 5.00 p.m.
Last date and time for acceptance of and payment : 16 July 2009 at 5.00 p.m.
for Rights Shares with Warrants (at 9.30 p.m. for electronic applications)
Last date and time for renunciation of and payment : 16 July 2009 at 5.00 p.m. for Rights Shares with Warrants
Last date and time for application and payment for : 16 July 2009 at 5.00 p.m. excess Rights Shares with Warrants (at 9.30 p.m. for electronic applications)

First Resources - 1Q09 in a Snapshot

FR's CPO ASP in 1Q09 declined 36.7% YoY to Rp4,843. Due to accounting recognition of sales upon delivery, sales vol. also dropped 6.7% YoY to 78.5k tons (21.7% Citi FY09E) despite higher CPO prod'n. Consequently, 1Q09 total rev. fell 41.1% YoY to Rp432.2bn. (16% Citi FY09E; 19% Consensus).

FR has a relatively young plantation profile (8.3 yrs avg. age). Hence, unlike most planters, negative impact of so-called biological slowdown from the more mature trees was cushioned by the yield improvement of its maturing trees. CPO production volume increased 7.4% YoY to 77.3k tons. (22.3% Citi FY09E).

In accordance to the group's policy, the group performs valuation of its biological assets on a half-yearly basis. Hence, no gain/losses arising from changes in valuation of bio assets in 1Q08 and 1Q09.

Selling expenses decreased by 83.3% to Rp7.9bn following Indo's government decision to scrap the CPO export tax towards the end of 08.

As the rupiah weakened from Rp10,950/US$ at end 2008 to Rp11,575/US$ at end of Mar-09, FR incurred forex losses of US$ Notes of Rp46.4bn and Rp26.6bn market-to-market losses from cross-currency swap. The cross-currency swap was done in Nov-07 to convert IDR bond to a synthetic USD obligation with competitive interest expense of 7.4% fixed for 5 years.

Given above factors, overall NP declined 81.8% YoY to Rp57.4bn (7% of Citi's FY09E; 8.7% consensus). But at the EBITDA level, FR's 1Q09 EBITDA of Rp217.8bn accounts for 16.4% of Citi's FY09E and 17.7% Consensus.

We enter 2Q with more optimism against a backdrop of a firmer CPO price environment and a stronger rupiah. Low stock inventory in Malaysia, soybean prod'n/export issue in Argentina etc should provide support to CPO prices. To put things into perspective, Apr avg. CPO price stood at US$692/t vs. Mar avg. of US$556/t vs. YTD avg. of US$592/t vs. 4Q08 avg. of US$450/t. Current CPO price still hovers at >US$800/t level. As for the rupiah, 1Q08 avg. of Rp9,258/US$ vs. 1Q09 avg. of Rp11,614/US$ vs. current ave. rate of Rp10,840 (since Apr-09).

Noble Group - Speculators back in soft commodities?

Agri > metals, energy prices. Soft commodity prices have recovered strongly and are now back near late-2007 levels (ahead of metals and energy prices, which have generally recovered to 2005 levels). Recent interest in soft commodities has also been fuelled by fears of a weakening US$ – a theme investors have picked to hedge against inflation coming from changes in macro policies. Inventory positions remain at low levels for many soft commodities, with global stock-use ratios near multi-year lows.

Rise in speculative positions. While the open interest in most soft commodities has manifested in recovery trends in the past few months, it is key to note that speculative positions have registered a sharper increase. For example, speculative positions in corn futures have risen to near 20%, just a shade below peak levels in 2008.

Watching supply-side constraints. Agriculture markets have been buoyed by supply-side constraints – the effects of the curtailed use of fertilisers due to the sharp rise in prices last year, which will be felt even into the next season, and the negative impact of adverse weather (eg, the Argentina soy crop has gone down by up to a third from peak levels two years ago due to the extremely dry weather) While there may have been reduced meat demand in developed markets, developing markets such as China are still registering growth in pork consumption. Demand in volume terms for most soft commodities is expected to be resilient despite current macro weakness.

12-month price target: S$1.95 based on a PER methodology. Catalyst: Overall volumes growing beyond 13% YoY this year. Strong operating results for calendar 1Q09 and successful risk management (avoided major writedowns in receivables and inventory 2H08) have strongly boosted the share prices of the three listed traders we cover. We believe Noble is the stock with further upside potential .For the other agri traders, we expect share price catalysts to come from the companies’ respective capital market plans for the next 12 months (eg, Noble using another listed vehicle to raise capital for its more capex-intensive units).

Golden Agri-Resources Ltd: Downgrade to HOLD

Dismal 1Q09 results. Golden Agri Resources (GAR) posted a dismal set of 1Q09 results on Friday. Revenue slipped 44.8% YoY (-30.3% QoQ) to US$412.2m, meeting about 17.6% of our full-year estimate; net profit (excluding fair value adjustments of its bio-assets) plunged 93.7% YoY (- 78.3% QoQ) to just US$8.6m (2.6% of FY09 estimate). There are three reasons for the shortfall. First, the plunge in CPO (crude palm oil) prices from US$1077/ton in 1Q08 to US$511/ton in 1Q09, and we understand that GAR's achieved sales price was even lower at US$482/ton. Secondly, the drop in CPO production (down 17% YoY and 12% QoQ) due to tree stress and heavy rainfall in certain locales. Thirdly, higher fertilizer costs, which raised the cost of production by 10% to US$275/ton, and continued to weigh on margins.

Has CPO production bottomed in 1Q09? Despite the volatile commodity prices outlook, management believes that the demand for CPO, being the cheapest edible oil, is supported by core demand from the edible oil and oleo-chemical markets. Hence, it is keen to both expand its high-margin upstream business and select downstream capabilities and distribution. It expects to spend US$225m in capex this year. Management is also confident that GAR has seen the bottom of its CPO production, as the worst of the tree stress (due to the drought in 2006) has passed and its yields should start to normalize. Nevertheless, it has retained a tinge of caution as it has scaled down its new planting target from 50k hectares to 30k.

Possible rights issue overhang. Separately, on report that GAR has appointed BNP Paribas and Credit Suisse to raise US$200m via a rights issue, it clarified that it has not given the mandate yet. Management admits it is in talks with several investment banks on the possibility as it feels that trying to raise funds via debt is still difficult and expensive. Management adds any additional funds would come in handy when "opportunities arise". Assuming that GAR is looking to raise that amount, the potential dilution is at least 7%.

Downgrade to HOLD. Due to the dismal 1Q09 results, we have pared our FY09 earnings by 22.7%, but our fair value remains at S$0.40 based on 10x FY09F PER (vs. 8x previously - in line with the general re-rating of the overall market). But given the potential overhang from the rights issue as well as the limited upside, we downgrade our rating to HOLD.

First Resources: 1Q09 prices locked-in too early

1Q09 prices locked-in too early. First Resources (FR) reported 1Q09 net profit of Rp57.4b (-85% q-o-q, -59% y-o-y), mainly because average selling price achieved (Rp4,843/kg) dropped by 37% y-o-y and 27% q-o-q and was below average spot of Rp6,182/kg. FR had locked in over 50% of its production at the lower end of 1Q09 price range as the group had anticipated prices to deteriorate further. FR also had some outstanding sales that missed 1Q cutoff date; although volumes were not significant.

Translational FX losses further dragged profits. The lower profit was also caused by Rp46.4b translational FX losses on its USD notes and Rp24.6b mark-to-market losses for its cross currency swap contract. Stripping out the translational losses, annualized net earnings were in line with our forecast and slightly ahead of consensus.

Forecasts revised to include higher CPO prices. In line with our recent CPO price upgrades to RM2,300 (FY09F) and RM2,300 (FY10F) from RM1,900 and RM2,000, respectively, we have revised FR's FY09F and FY10F EPS by 21.5% and 14.4% to Rp546 and Rp625.

Buy call maintained, TP raised to S$0.70. We expect FR's subsequent quarters' results to improve substantially on the back of strong CPO price recovery, seasonally higher production level and reduced FX losses. Based on our revisions, the counter's valuation was, hence, upgraded to S$0.70, based on 30% discount to DCF (WACC 14.4% and terminal growth rate 3%). Maintain Buy.

Noble - Pipeline to drive volumes, margins

Despite limited near-term demand visibility and, on Noble’s observation, no evidence of a significant recovery in physical markets, the company remains confident that key investments in infrastructure and processing capabilities in its agricultural and energy divisions (including the recent acquisition of Gloucester Coal) will support a doubling of volumes carried over the coming four-year horizon, while we believe internalised profit nodes and improved optionality should be a boon to margins.

Investors appear to broadly concur with our positive stance on Noble’s A$7/share all cash bid for Gloucester Coal announced 15 May, acceptance of which we believe currently stands at c.62%. Beyond the immediate 2mn MT pa in thermal and metallurgical coal production capabilities, we believe Noble stands to realise significant synergies through access to increased port capacity — Noble has a c.10% equity interest in the BHP-led Newcastle Coal Infrastructure Group coal terminal which, on completion in 1Q10, will add 30mn MT in coal loading capacity with expansion potential up to 66mn MT — and linkages with existing business lines and customers.

On 1 June, Noble announced that it has renewed, extended and secured a US$100mn increase to its existing US$700mn revolving credit facility at a 160bps spread over LIBOR (all in), further adding credit capacity to Noble’s available committed and uncommitted bank and trade facilities of US$4.2bn as at end-1Q09. Combined with the group’s US$1.2bn in cash as at 1Q09 (of which we expect US$340mn to flow to Gloucester’s shareholders), Noble’s proactive capital management places it well to respond to market opportunities and weather threats, while the group’s fiscal conservatism should continue to garner ‘flight-to-quality’ in an environment of heightened counterparty awareness.

Despite a strong run in recent weeks, we continue to see long-term value in Noble’s business and, in light of resilient volumes and optimistic growth guidance, we will be reviewing our (in our view highly cautious) medium-term tonnage assumptions. BUY rating maintained.

Valuation methodology: We value Noble using the residual income (RI) approach, a measure of a firm’s earnings after taking into account a charge measuring stockholder’s opportunity cost of capital. As such, RI provides a measure of the excess returns a firm is able to generate on existing and future projects. The RI valuation model breaks the intrinsic value of a stock into two elements: 1) the current book value of equity, and; 2) the present value of expected future residual income.

Risks to price target: Noble as a supply chain manager operates in multiple geographies and in multiple commodities. While Noble’s 1Q09 results have demonstrated the resilience of the integrated supply chain business model, profitability and hence, our price target are dependent upon our assumptions pertaining to demand for commodities, as well as market share gains to maintain volumes and margins — in addition to continued management of counter party and commodity price risk.

AusGroup Ltd: Stronger but external risks remain

Revenue down 23.5% QoQ. AusGroup Ltd posted a 23.5% QoQ decline in 3Q09 revenue to A$99.6m. Despite a higher gross margin of 15.2% (11.8% in 2Q09) due to timing effects, net profit fell 17.1% QoQ to A$4.1m. On a YoY basis, both net profit and revenue (up 28.3% YoY) compared favorably with a net loss of A$3.4m recorded a year ago. The company's results were better than expected as our estimates had provided for revenue drop through additional contract cancellations.

Tough external environment. Financing difficulties and a steep decline in commodity prices have impacted the mineral resources sector's capital expenditure programs. This is also true, to a lesser extent, in the oil & gas sector. The size and availability of future projects is a question mark. Our view is that select blue chips like BHP Billiton will continue to spend and replacement capex should pick up slowly. But the size of the pie appears to have shrunk compared to last year's levels. Additionally, AusGroup's margins may be at risk due to 1) increased competitive pressure and 2) negative operating leverage - a fixed cost/falling volume effect.

But reaping rewards from overhaul of execution capabilities. Over the past year, management has been working on improving AusGroup's tendering process in facets such as selection of opportunities, costing, and ensuring tighter terms and conditions. It has also been focused on improving management oversight on projects and implementing a more robust risk management process. This overhaul is clearly a long-term work in progress but is already producing visible results. We see three key indicators: 1) a more realistic revenue booking process; 2) an impressive decline in receivable days from 103 days to about 50 days over 9M09 (our estimate); and 3) the pay down of A$24.3m in debt in 9M09, taking the company to a net cash position.

Valuation. AusGroup's current order book stands at A$230m, up 37% QoQ. We have adjusted our earnings estimates upwards and now estimate revenues of A$80m in 4Q09F (down 20% QoQ) and A$380m in FY10F (down 13.6% YoY). This implies AusGroup winning another A$230m of orders over the next 14 months. 4Q09 will be a better benchmark of both operating conditions and AusGroup's ability to sustain this improvement in internal processes, in our opinion. AusGroup is up 186% YTD. Recommend HOLD with S$0.55 fair value (previously under review). This pegs AusGroup at 13x FY10F earnings - at a slight discount to ASX-listed competitor Monadelphous.

Olam International: Bringing in Temasek

Temasek to own 13.7% of Olam. Olam yesterday announced that on 30 May 2009, it had entered into a subscription agreement with Breedens Investments and Aranda Investments (both are wholly owned subsidiaries of Temasek Holdings) – henceforth, collectively referred to as Temasek. Subject to the terms and conditions of the agreement, Olam plans to raise S$437.5m of additional equity through issuance of an aggregate of 273.46m new shares to Temasek at an issue price of S$1.60. Following the issuance, Temasek would own 13.7% of Olam’s enlarged capital.

Minimal EPS dilution (net of interest savings). The placement would dilute the stock’s FY10F and FY11F fully diluted core EPS (net of interest savings – est. at 4.8%) by 5.6% and 7.0% to S$0.127 and S$0.156, respectively. There would be no dilution for FY09F EPS, as the proposed placement is targeted for completion only in July 2009.

Proceeds to reduce gearing and fund acquisitions. The group plans to employ the proceeds to fund further acquisitions; although there was no specific mention on potential targets. Through this issuance, Olam’s gearing ratio should be reduced to 1.81x (including fixed deposits), thereby increasing its leverage capacity – assuming long-term lending rates would be favourable.

TP raised to S$2.55, Buy call reiterated. Based on our strategy report dated 21 May 2009, we have raised our STI target to 2,800, which implies a target PE of 16.0x. Hence, based on 10% premium (i.e. 18.0x PE), our TP is now raised to S$2.55. We reiterate our Buy call.

Wilmar potential listing of China operations could unlock value

We raise our FY09-11F earnings forecasts for Wilmar by an average of about 28% to factor in higher margins post the release of 1Q09 results. Key drivers included wider margins for the consumer pack, palm and laurics business. While management cautioned that the high margins (US$106/tonne for consumer pack and US$55/tonne for palm and laurics) are probably not sustainable, we have raised our margin assumptions to factor in the better-than-expected 1Q09 performance.

Wilmar dominates in China, with a 45% market share in the consumer pack business and a 23% market share in the oil seed crushing business. Wilmar can leverage its large distribution network in China to drive new product adjacencies, such as rice and bottled water. With a profit base in excess of US$600mn in China, a listing of the China operations would help to unlock value for the group, in our view. Price target raised to S$5.68

target to S$5.68 (from S$3.80) to reflect our higher earnings forecasts and the rolling forward of our valuation to FY10F. Wilmar’s dominant franchises, continued interest in commodity plays and the potential listing of its China operations should underpin the share price. The main risk to our price target stems from CPO price fluctuations. We see possible downward price pressure from: 1) a marginal impact from biological tree stress, resulting in higher-than-expected production, particularly from Indonesia; 2) larger-than-expected soybean production in Argentina and Brazil; and 3) more severe demand destruction from a prolonged global economic downturn.

First Resources: FX losses continue to be a drag

Lower CPO prices affecting bottom line. First Resources (FR) reported 1Q09 revenue of IDR432.2b, down 41.1% YoY. This was mainly attributable to a decline in the average selling prices (asp) for both CPO and PK and a decline in sales volume of CPO. Gross profit declined 60.3% YoY to reach IDR212.5b, down from IDR535.7b last year as a result of an increase in the cost of sales due to increases in the cost of fertilizers, depreciation expense and changes in CPO and PK inventory. Consequently, gross profit margins have declined from 73.0% in 1Q08 to 49.2% in 1Q09. PATMI eased 81.6% YoY from IDR311.4b to reach IDR57.4b.

Forward sales created high base effect in 4Q08. A check with management revealed that 4Q08’s asp for CPO was IDR6,644/kg, versus IDR4,843/kg in 1Q09, despite spot prices trending upwards since Jan 09. Apparently, the 4Q08 CPO’s asp benefitted mainly from the higher priced forward sales FR did in early FY08. Around 30% of 4Q08’s sales volume were locked in at prices significantly higher than spot.

FX losses drove financial expenses up. Financial expenses was up significantly YoY, reaching IDR111.4b in 1Q09. This significant increase is mainly due to translation losses of IDR46.4b arising from foreign exchange translation of US$ notes with the weakening of the IDR. In addition, there was incremental marked-to-market losses of IDR24.6b incurred on a cross currency swap that FR entered into in Nov 07, to swap both the principal and interest payments of its IDR bond into US$ liabilities.

Low cost of production to be maintained. Looking forward, management has guided that they expect to continue maintaining a relatively low cost of production of US$200/tonne. Maintain fair value of S$0.42. We are maintaining our CPO price assumption of RM1,900/tonne for FY09. Using a P/E of 10x forward earnings, our fair value for FR is S$0.42. With the stock trading at S$0.605, we maintain our SELL call on the stock from a valuation perspective.

Olam International : Equity placement to Temasek Holdings

Placement of new shares to Temasek Holdings. Olam International Ltd (Olam) has announced a placement of 273.5m new shares to two wholly- owned subsidiaries of Temasek Holdings (Temasek). The new shares, priced at S$1.60, represents a 17.4% discount to the weighted average price of trades done on 29 May 09 and will raise net proceeds amounting to S$437.0m. The bulk will be used to finance new capital expenditures and acquisitions, while a small portion will be used for general corporate purposes. We expect the placement to result in a dilution of 16% for existing shareholders. Nevertheless, Temasek's strategic investment will enhance Olam's long term growth prospects by strengthening its ties with emerging markets and by opening up more growth opportunities in these areas.

Following the placement, Temasek will be Olam's second largest shareholder with a 13.76% stake and will be given a board representation. Placement eases gearing, improves financial flexibility. The equity placement exercise will ease Olam's gearing ratio significantly. Assuming that the placement was concluded in 3Q09, the group would have reported an adjusted net gearing ratio of 0.31x, much lower than the 0.83x it reported. More importantly, the enlarged equity base will enable Olam to expand its debt capacity by up to US$600m. With the additional financial flexibility, Olam is better equipped to pursue organic and inorganic growth opportunities. The group remains keen on acquiring assets that are value- accretive. Although its move towards an asset-intensive model could lift the group's risk profile, management remains committed to investing only in projects that can reap returns in excess of the industry average. It has an IRR target of 20% and ROIC target of 12% (5ppt above its assumed WACC) for acquisition targets.

Downgrade to HOLD on valuations. Olam maintains its medium-term performance targets of 25% - 30% earnings CAGR and 20% ROE. We are leaving our earnings estimates unchanged, but our core FY09F EPS drops from 10.8 S cents to 9.3 S cents following our adjustment for the dilution. We view Temasek's strategic investment in Olam positively as it could serve as a platform for future growth opportunities. In addition, we believe that Temasek's financial muscle could support the group's expansion plans should the need arise. We have raised our valuation parameter to 17x (from 15x) in line with the STI's re-rating, bringing our fair value estimate to S$2.01 (previously S$2.06). Given yesterday's sharp appreciation, we downgrade our rating to HOLD.

Olam International - Looking beyond dilution to accretion

Olam International placing 13.8% stake to Temasek Holdings: Olam is raising S$437.5million in cash by placing 273.5million new shares at S$1.60 each (17.4% discount to last Friday's VWAP) to Temasek Holdings. Temasek will end up with a 13.8% stake in Olam (recall Temasek used to be a 4.9% investor in the company from 2002 to 2006). The placement is subject to regulatory approvals and a shareholder vote at an EGM to be called.

Proceeds of the placement are earmarked for M&A and organic growth investments: The group is highlighting that it will utilize most of the placement proceeds for organic and inorganic growth investments. We have not modeled any accretion to Olam’s bottom-line from as-yet announced acquisitions but have factored in the enlarged share base. Any accretion from new acquisitions or investments would boost the group's medium-to-long term EPS growth prospects and could help the stock to regain its high-growth earnings multiples. Note the stock’s average P/E multiple since 2005 is 26.0x, compared to only 19.7x today on FY Jun 2010E earnings (post-dilution). Our end Jun 2010 price target is maintained at S$2.60/share, based on a 1.0x sustainable PEG ratio.

Gearing would drop in the short term: But the placement is not intended to reduce the group’s gearing as management remains comfortable with the group's access to working capital and its ability to sustain business activity at present levels. Management indicates that the placement proceeds, if geared up optimally to the group's targeted levels would allow for new investment capacity of up to US$900million, versus US$658million in announced acquisitions since 2007 to date.

Key risks to our view: (1) sharp declines in demand for agricultural commodities; (2) another prolonged disruption to credit markets; (3) an increase in protectionism and the raising of trade barriers globally, reversing recent globalization trends, and (4) a reversal in the market’s appetite for higher beta, higher growth stocks.

On Temasek Holdings to become second largest shareholder of Olam

Olam on its new development to raise S$437.5m by way of subscription of 273.5m new ordinary shares at an issue price S$1.60 by Temasek Holdings.

- Issue price represents a 17.4% discount to weighted average price of S$1.937 for trades done on 29 May 09.

- Temasek Holdings to become second largest shareholder (13.76%) after main sponsor, Kewalram Chanrai Group.

- Major shareholders, Kewalram Singapore Ltd and Mr. Sunny George Verghese, which together hold approx 32%, have undertaken to vote in favour of this proposal.

- Reasons for raising capital:

a) Not de-gear its balance sheet.

b) To be able to resume and accelerate organic and inorganic growth.

c) Require S$437.5m to fund growth over next 2-3 years.

- Net proceeds will be used for:

i) To finance new capital expenditures and acquisition of assets for the Group (80-100%)

ii) General corporate purposes of the Group (0-20%)

- With the S$473.5m of capital, Olam could raise US$600m of debt.

- Olam is still seeking acquisition targets and may seek a 5-7 years of banking facility once it identifies acquisition targets if the pricing is right.

Based on consensus forecasts, Olam is trading at 16.9x FY10 P/E (19.6x FY09 P/E) and 3.6x FY10 P/B (4.2x FY09 P/B).

AusGroup - Stronger but external risks remain

Revenue down 23.5% QoQ. AusGroup Ltd posted a 23.5% QoQ decline in 3Q09 revenue to A$99.6m. Despite a higher gross margin of 15.2% (11.8% in 2Q09) due to timing effects, net profit fell 17.1% QoQ to A$4.1m. On a YoY basis, both net profit and revenue (up 28.3% YoY) compared favorably with a net loss of A$3.4m recorded a year ago. The company's results were better than expected as our estimates had provided for revenue drop through additional contract cancellations.
Tough external environment. Financing difficulties and a steep decline in commodity prices have impacted the mineral resources sector's capital expenditure programs. This is also true, to a lesser extent, in the oil & gas sector. The size and availability of future projects is a question mark. Our view is that select blue chips like BHP Billiton will continue to spend and replacement capex should pick up slowly. But the size of the pie appears to have shrunk compared to last year's levels. Additionally, AusGroup's margins may be at risk due to 1) increased competitive pressure and 2) negative operating leverage - a fixed cost/falling volume effect.

But reaping rewards from overhaul of execution capabilities. Over the past year, management has been working on improving AusGroup's tendering process in facets such as selection of opportunities, costing, and ensuring tighter terms and conditions. It has also been focused on improving management oversight on projects and implementing a more robust risk management process. This overhaul is clearly a long-term work in progress but is already producing visible results. We see three key indicators: 1) a more realistic revenue booking process; 2) an impressive decline in receivable days from 103 days to about 50 days over 9M09 (our estimate); and 3) the pay down of A$24.3m in debt in 9M09, taking the company to a net cash position.

Valuation. AusGroup's current order book stands at A$230m, up 37% QoQ. We have adjusted our earnings estimates upwards and now estimate revenues of A$80m in 4Q09F (down 20% QoQ) and A$380m in FY10F (down 13.6% YoY). This implies AusGroup winning another A$230m of orders over the next 14 months. 4Q09 will be a better benchmark of both operating conditions and AusGroup's ability to sustain this improvement in internal processes, in our opinion. AusGroup is up 186% YTD. Recommend HOLD with S$0.55 fair value (previously under review). This pegs AusGroup at 13x FY10F earnings - at a slight discount to ASX-listed competitor Monadelphous.