Olam has addressed the gearing bottleneck via two equity placements totaling S$745mn, improving its adjusted net gearing ratio to 0.6x from a peak of 1.9x in December 2007. The improved gearing enables it to regear for organic growth and M&As which are expected to drive 25% of its future earnings growth. It has managed to secure 15 deals since 2007, totaling US$742mn. Meanwhile, it is reviewing 14 deals. Thus, we can expect more M&A moving forward, in our view.
Most of the concluded M&As are moving Olam up the supply chain. Management indicated future capital deployment will remain on the upstream division, securing volumes at lower cost and hence boosting margins. Up and midstream margins are usually 15-25% higher than downstream. Based on its track record, we expect future assets/business acquisitions to be shareholders’ value accretive. Net contribution margins have improved around 20bps per annum since FY02.
Our PO of S$3, based on a Gordon growth model, equates to a FY10E P/E of 22x (historical band: 8.2x to 38.4x) and P/B of 3.4x (1.1x to 6.6x). Current share price implies an ROE of 20%, 500bps below long term sustainable ROE of 25%. We expect the share price to continue to re-rate upward once management translates M&As into results and also as more M&As are announced.
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