Thursday, June 10, 2010

Olam - Maintain Buy by DMG (10 Jun 2010)

Acquisition of Gilroy another inorganic initiative, which we view positively. Olam’s US$250m acquisition of Gilroy will strengthen Olam’s dehydrated and vegetable products business, and also bring on significant synergies with its earlier acquisitions such as SK Foods and Key Foods Ingredients. Olam expects its combined US dehydrated vegetable operations to give EBITDA margin of 14- 15%, sharply wider than current Olam’s overall EBITDA margin of 6.2%. As our FY11 and FY12 earnings forecast have already factored in acquisitions, we are maintaining our forecasts. Olam remains a BUY with target price of S$3.24.

Olam announced it will acquire the dehydrated and vegetable products business and operating assets of Gilroy from ConAgra, including its dehydrated onion, garlic, capsicum, Controlled Moisture vegetables, purees and fresh vegetable operations. The transaction is expected to be completed in 30-60 days. As part of the acquisition, Olam has entered into a long term (5-year) supply agreement to cater to ConAgra’s ongoing requirements for dehydrated vegetable products.

Management expects wide EBITDA margin of 14-15%. Olam expects the acquisition to be earnings accretive from the first year of consolidation. Together with Olam’s existing US dehydrated vegetable operations, this is expected to generate revenues of US$300-350m (4% of Olam’s FY10F revenue) and an EBITDA margin of 14-15% (versus Olam’s 3QFY10 EBITDA margin of 6.2%).

Olam still has the capacity to make acquisition of up to US$1b, and we expect further earnings growth from more acquisitions in the future. Management indicated that there is no intention to do any equity raising in the short term

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