This purchase price is about a third of the assets’ estimated replacement value of US$130m and is in line with Olam’s expansion into food ingredients processing. Olam believes that this business can generate US$200m in revenue and EBITDA margins of 12–13%, ie, more than 2-fold its typical supply chain margin at steady state operations by FY12 or about 5% of the net profit forecast for FY12, with unleveraged ROE likely in the range of 20% plus. We expect FY10 will be near breakeven given limited time to complete contracts with growers & customers this season (legal completion expected in July).
This will expand its range of dehydrates – it already has a presence in garlic (Key Foods Ingredients in 2007) and onion dehydrates (DeFrancesco & Sons, also via a Chapter 11 sale in 2008) in the US. The dehydrates segment represents a value-add expansion for Olam’s nuts, spices and pulses segment (this segment contributed to 18% of Olam's profit pool in 1H09).
While Olam has continued with rather attractive but smaller-sized M&A deals (such as this one for SK Foods), tightness in the long-term credit market means that it has not yet re-embarked on large-scale M&A deals.
To that end, we note the most important benefit of Olam's proposed S$438m placement of 273.5m new shares to Temasek is financial – we anticipate that having Temasek as a 13.8% shareholder of Olam could improve its access to long-term debt financing, which we believe is a key factor that could help Olam’s plans to accelerate growth via acquisitions. This will be put forth for shareholders' approval on 29 June.
12-month price target: S$2.10 based on a PER methodology. Catalyst: Enhanced earnings contributions from the various M&A deals completed in the past 2-3 years.
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