We spoke with Olam management recently and came out optimistic on its future prospects. Olam has a net profit target of US$1b by FY16, which is expected to be achieved via alreadyannounced projects and other new initiatives. Management does not expect any equity fund raising to help it achieve its target. We also like Olam’s sound track record - 33% CAGR net contribution over past 3 years. Maintain BUY with our 3-stage DCF target price of S$2.98. Olam’s FY12 PE of 12.7x is also lower than historical average of 18x.
Olam maintains its target of
US$1b net profit by FY16. The bulk of the target will be achieved via organic SCM business growth (forecast 15-17% pa volume growth) and already-announced projects. In addition, management will work on upstream initiatives eg on plantations and fertilizer business as well as selective mid-stream projects to drive its earnings. Management does not foresee any further equity fund raising to enable it to meet the US$1b target. Instead, management will look to borrowings, given management’s comfort zone of 2-3x leverage, versus Sep 11’s 1.7x.
Management’s strategy is to target controlling stakes in upstream assets. Besides getting the off-take for SCM business, Olam also aims to benefit from the wider margins from the upstream operations. Olam will specifically target upstream assets where excess returns can potentially be achieved. In fact, the sharp improvement in net contribution/ton from FY09 till FY11 was largely due to Olam’s increasing upstream operations.
No comments:
Post a Comment