Target Price S$2.58
What’s New
• Buying its first Brazilian sugar mill. Olam is buying Usina Açucareira Passos S.A. (UAP) for BRL255m (US$128.8m). It will invest another US$111.5m over the next five years to improve its agricultural (cane growing) and industrial (milling) capacity and efficiency.
• Key investment highlights:
a) UAP owns a sugar mill in Passos, within the state of Minas Gerais, Brazil.
b) The facility has a crushing capacity of 1.75m tonnes p.a., which will increase to 3m tonnes p.a. following the additional capex of US$111.5m.
c) The mill is in close proximity to export markets, being 480km from the port of Santos, with no competing mills within an 80km radius.
d) Steady state is targeted for FY16 and the investment is expected to generate an equity IRR of over 20%.
Stock Impact
• Limited impact over the next two FYs. The acquisition will only be earnings accretive in FY14 and we estimate earnings contribution in FY14 to be less than 1%. However, there is upside risk if sugar prices rise in the absence of favourable production conditions, i.e. weather, in other sugar producing regions.
• Extends supply chain network. Olam currently has two sugar mills in India and sugar refining plants in Nigeria and Indonesia. The new plant will extend and strengthen the group’s sugar supply chain. The acquisition is in line with the group’s strategic plan for its sugar business to build a configuration of milling assets in large sugar producing countries that have a comparative cost advantage.
Earnings Revision/Risk
• No changes to our earnings estimates. Major risks for the new investment include execution risk and a sustained decline in sugar prices.
Valuation/Recommendation
• Maintain BUY. Our target price remains at S$2.58, based on 15x average FY12/FY13 core earnings, implying 1.1x PEG. Current valuations are undemanding at 8.7x FY13F core PE and 1.3x FY12F P/B, which are 1SD and 2SD below their means respectively.
Share Price Catalyst
• Resumption of earnings growth.
• First Brazilian sugar milling asset
• No financial impact until FY14
• HOLD with lower S$1.86 FV
Maintain HOLD with lower S$1.86 fair value
Growing uncertainty in Europe may continue to see increased volatility in commodity stocks and we do not expect Olam to be spared, although it does operate mostly in the more demand-resilient soft commodities space. Ascribing a lower 12.5x multiple to its blended FY12/13 EPS, our fair value eases from S$2.24 to S$1.86. Maintain HOLD and would be buyers closer to S$1.60.
CIMB Target S$2.61
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