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.

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