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.
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