We increase FY10F earnings by 6% and by 2.5% for FY11F, driven mostly by lower assumptions for debt and financing costs as compared to our earlier estimates.
Delivering returns on investments and M&A’s will be critical in determining the company’s future business momentum. Olam has invested about US$750mn in various mergers and acquisitions over the past two years. We believe it has seen mixed results in integrating and improving the profitability of new ventures.
Recent equity dilution worth S$437mn to Temasek helps Olam’s balance sheet. Olam’s net gearing should fall from ~4x in FY08 to 2.1x in FY10 post dilution. The near-term impact from the stake sale looks positive, as our calculations indicate FY10F earnings would have been 5% lower sans equity raising.
We recommend switching from Olam to Noble Group as we expect Noble to outperform Olam driven by attractive valuations on a similar return profile, key Greenfield investments nearing maturity and likely re-rating due to restructuring of its coal assets portfolio.
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