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%).
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