We believe Olam’s share price strength comes largely from the hope of M&A activities and potential contributions from Temasek. This anticipation, we feel, has been overplayed, and the earnings dilution/contribution disconnect (i.e., immediate EPS dilution from the placement vs. the earnings lag from new acquisitions) shows that much has been discounted with the high valuations. M&A, while exciting, could raise overall risk as the number of moving parts increases.
Our recent company visit indicates that the volume surge seen by the group in April/May ‘09 was due largely to Chinese re-stocking and has not been sustained. Cotton demand has slightly declined in June, and the outlook is weak. Wool and rubber remain weak due to continued poor consumer spending. Cocoa and dairy, which are said to be recession-resistant, are also showing slight weakness.
Our target price of S$2.00 is based on the Gordon Growth method and has been raised after factoring in the recent share placement. Assumptions: ROE of 19%, a long-term growth rate of 3% and COE of 10%. Upside risks include better-than-expected volumes in its products, market share gains and new products.
Click here for more Commodity Stocks Technical Analysis
Sponsored Links
Comments
No response to “Olam - Positives reflected in the price; downgrade to Sell”
Post Comments (Atom)
Post a Comment |
Post a Comment