Olam International: Sustaining shareholder value

Tuesday, June 30, 2009

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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