Olam share buyback reflects management’s optimism

We read Olam’s share buyback program positively. Firstly, Olam is buying back shares when its P/E is close to the trough in Mar 2009, in the midst of the global financial crisis. Olam also has the financial resources to execute the share buyback program. We remain positive on Olam’s fundamentals, as 90% of its net contribution comes from the food business, which continues to see strength (the weakness in the recent results was due to the industrial commodity segment). We maintain BUY on Olam with a target price of S$2.56, which is derived from a 3-stage DCF valuation model.

Olam commenced a share buyback program on 8 Jun. This follows the mandate which was renewed on 28 Oct 2011, where Olam may purchase up to 10% of its total issued shares. All shares purchased under the share buyback program may be held as treasury shares or cancelled, as Olam may decide from time to time. Funding for the program will be done from Olam’s existing resources.

On 8 Jun, Olam bought back
3.2m shares (representing 0.13% of its issued share capital) at an average price of S$1.63 per share.

We see limited share price downside given Olam’s resilient corporate fundamentals. The food commodity space is more resilient than the industrial commodities segment in an environment of economic weakness, and this was evident in the recent Olam results. Olam currently trades at 9.1x FY13F P/E, versus the trough P/E of 8x in Mar 2009, and historical average of 18x. Olam’s share price downside is seen to be limited.

Share buyback would enhance EPS. Assuming Olam buys back 5% of its issued share capital ie 122m shares, at an average price of S$1.70, this will require some S$207m. As of Mar 12, Olam has cash of S$1,150m, which is more than 5x the required cash outlay. If 5% of the shares are bought back and cancelled, then Olam may see its FY13F EPS increase to 20.6S¢ from our current forecast 19.6S¢. Its FY13F book per share will fall to S$1.35 from our current forecast of S$1.36 – hence the impact on P/B from the share buyback program is seen to be negligible.