Management expressed that the main attraction of this deal was the long tenure, which is in line with its intention to lengthen the overall term of its debt portfolio to match higher asset intensity. While the entire amount may not be utilised in the immediate term, being backed by this cash will give management the confidence in executing M&A plans.
Post-CB, Olam has an estimated cash position of US$900m. With no immediate re-financing needs, non-utilised cash for the moment will be used to retire existing higher interest debt. CEO Sunny Verghese stated that there is unlikely to be another equity-linked capital raising exercise for the next 3 years and reiterated the target gearing ratio of 2.5-3.5X for working capital and 1-2X for long-term assets.
Separately, Olam also announced the acquisition of a stake in New Zealand Farming Systems Uruguay (NZFSU), a New Zealand-listed firm with its dairy farming operations in Uruguay. The stake was purchased via Hunter Hall Investment Management. At this moment we believe earnings contribution is negligible, although this small non-controlling stake could be a precursor to a larger stake in the future.
While we believe there could be a potential share price overhang around the conversion price, the 7.3% sell-down has been overdone, and is a good entry point for investors. Conversion price now represents a 35% premium to current share price. We maintain our target price of $2.98 which is based on 25X 2010F.
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