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Olam International plans to start new businesses and acquire companies which would contribute about 40% of revenue growth in the next 6 years.
The company, which supplies ingredients to some of the world's top food firms like Nestle, has bought 8 companies in the last 15 months but refused to comment on talk that it plans to bid for Australia's Dairy Farmers. The Australian milk and cheese producer is owned by some 2,000 local farmers and put itself up for sale in Feb. It has received an offer from Australia's dairy and juice producer National Foods, owned by Japanese brewer Kirin Holdings, that values the firm at US$920 million.
"Our acquisition guideline is to make acquisitions not larger than 10% of our market capitalisation. But that doesn't mean we would not go for a bigger target," Olam CEO Sunny George Verghese told Reuters in an interview on Fri.
Verghese said the company's recent plan for a $307 million (US$222 million) preferential share sale would allow it raise up to $1.6 billion (US$1.2 billion) in new debt which could then be used for acquisitions and funding of the existing business.
He said that the US$2.8 billion company, that aims to deliver compound annual growth of up to 20% in revenue and up to 30% in net profit, would be comfortable with a net gearing of 5x, which would mean about $4.5 billion in total debt.
"We are looking at 4 objectives in M&A," said Verghese.
He said the company wants to extend its presence into the midstream business of value added processing and go for upstream businesses in palmoil, rubbers, sugarcane, coffee and peanuts.
Olam would make acquisitions in countries where the regulatory environment makes organic growth difficult and go to large countries, like China, where it expects opportunities from deregulation.
Olam, which deals in 17 agriculture commodities like cocoa, coffee, rice, sugar, cotton and dairy products, recently started palmoil, rubber and soybean businesses and Verghese said the company would launch 7 or 8 new commodities businesses in the next 6 years.
Olam plans to start businesses in various beans and nuts like pecan, hazel and pine and get a larger share of markets in China, India, Brazil and the United States.
Verghese said Olam's main competitive advantage versus other trading houses was its sourcing of products from village or farm agents, about 156,000 in total. Most of the large trading houses typically source from agents at port cities where product are more expensive.
So far only 14% of its total assets are fixed assets, as in buildings and mills. But that is about to change.
The company last Nov announced to set up a 50/50 joint venture with Wilmar International . The $218 million JV called Nauvu Investments would own palmoil, rubber and sugar plantations in Africa, milling and processing plants and would also be involved in merchandising and distribution.
Verghese said owning plantations would mean making the company relatively less cash intensive and more asset intensive.
Olam International surged after global commodity prices rallied and investors sought to cover their short positions after a recent sell-off of the firm's shares, dealers said.
"This stock has been oversold but fundamentally the company looks fine. Some investors are also covering their positions, after massive shorting in recent weeks," a dealer said.
Chicago Board of Trade grains were firmer in Asian trading on Thu, extending gains made in the U.S. session which came partly on supply worries, but eased off earlier peaks.
"The preference share offering is also seen as a good move from the company to raise funds, investors are buoyant about the counter," another broker said.
Despite investment bank Merrill Lynch sticking to its 'sell' call on Olam International shares, the stock soared following news that the company is raising as much as $307 million through a 1-for-10 preferential offer of new shares. The surge was also backed by 'buy' and 'outperform' calls from 4 research houses.
The supply chain manager of agricultural products and food ingredients is offering 155.6 million new shares at $1.97 each. DBS Vickers, CLSA and Deutsche Bank issued 'buy' calls on the stock and CIMB-GK rated it as 'outperform'. Target prices ranged from $2.53 to $3.80.
In its report, DBS said that the funds raised 'will address market concerns over the group's gearing levels and will allow Olam to have a total debt capacity of some $1.7 billion at end FY08 to continue with its expansion plans'.
Going against the tide, however, was a report by Merrill Lynch maintaining its 'sell' call on Olam's shares. While the preferential offer may improve Olam's ability to pursue investment opportunities, Merrill believed that 'banks and rating agencies are becoming more conservative' and that 'potential stricter covenants and higher spreads could limit Olam's ability to gear up to previous levels'. Merrill also felt that Olam's shares were still expensive, and valued them at $2.00.
Olam's offering is already guaranteed a take-up of at least 70.7% based on irrevocable undertakings from Kewalram Singapore Limited and Sunny Verghese, Olam's MD and CEO. This also impressed DBS, which said that 'the undertaking by the sponsor family and CEO Sunny Verghese is testament to their confidence in the group's future prospects'.
At its intra-day high of $2.24 yesterday, the stock was just $0.03 from the $2.27 level last week before its plunge to $1.95 after Merrill Lynch's 'sell' call on grounds that Olam's dependence on leverage for growth would not be sustainable. Olam's shares then regained some lost ground after the company responded to Merrill's report.
Current market still volatile .... still depends on Uncle Sam.
Short term trading why bother with this .... contra on some top volume counter can make money easily.
Long term investor may see value in this; as for my opinion, agri comm is the way to go. Olam is agri comm trading company ... make money chance is high.
Good Luck!
I know that lah.
The question is whether the actual share price, how will it respond to this offer? Will more people buy to get the discounted shares? (and so the discount gets better)
Or, will people question the need for this fund-raising exercise?
Vested.
Offer price of $1.97. 1 for 10. That means still got to pay money, right?
Last traded price $2.07 before halt. I can't work out whether this is good news or bad leh.
Can any shifu please shed some light on how this will affect the share price?
is this a good time to buy this counter? any views or opinions?
Just to recap, here's the ML report. Olam has since posted some clarifications.
Olam crashed as much as 36 cents or almost 16% to $1.91, following a 'sell' recommendation by Merrill Lynch. In a March 25 report, Merrill downgraded Olam from 'neutral' to 'sell', with a fair value estimate of $1.60.
'Olam has become dependent on leverage for growth which, in our view, is not sustainable given the high 460% net gearing and low 1.7x interest coverage. We think a structural de-leverage is imminent since we believe bankers would likely impose stricter covenants as debt usage accelerates,' the report said.
S Suresh, Olam's senior vice-president of corporate affairs, said that Merrill's recommendation, made in a generally weak and volatile market, was likely to have triggered the selldown. He said Olam is still comfortable in terms of its working capital, and shareholders would have a good insight into its business.
| Date of Trading Halt * | 28-03-2008 | |
| Time of Trading Halt * | 1215 hours | |
| Reasons for Trading Halt * |
|
Woah was about to chop this bugger off when I saw your post.
Thanks onesharer : ) saved my life
Guess what? Olam posted a clarification paper on the ML report. (See SGX website).
The paper is 7 pages, with charts and things.
Feel sorry for the staff -- must had a busy work day yesterday compiling such paper. But, glad they made the effort.
Does this mean management can shake leg now since TP met long ago?
SINGAPORE, March 26 (Reuters) - DBS Holdings ,
southeast Asia''s largest lender by assets, may be in focus on
Wednesday after it said it has received permission to set up
eight new bank branches in India .
The S&P 500 and Nasdaq rose o Tuesday as rebounding metal
and oil prices lifted mining and energy shares, offsetting news
of the biggest drop in U.S. consumer confidence in five years.
Stocks and factors to watch:
- DBS Group said it has got permission fromIndia''s central
bank to set up eight new branches, quintupling its presence in
the world''s second most populous nation. [ID:nSIN98312]
- Merrill Lynch has downgraded Olam International
to "sell" from "neutral" with a target priceof S$1.60, citing
the commodity firm''s high debt levels and slower earnings growth.
[ID:nSGC001861]
- LuYe, a unit of private equity firm MBK Partners, said it
now controls 70.32 percent of the shares in drug company
AsiaPharm and that its takeover bid is now
unconditional. [ID:nSN3P61361]
- Newly-listed property developer Roxy-Pacific Holdings
said it intends to acquire a piece of land in Telok
Kurau in eastern Singapore for S$21.97 million ($15.9million),
funded by a mix of proceeds from its IPO and bank borrowings.
[ID:nSN3P80981]
- MCL Land offered S$213.5 million ($154.8 million)
for a 99-year leasehold condominium site at Yishun in northern
Singapore that it plans toredevelop into a larger residential
development. The price, which works out to about S$350 per square
foot per plot ratio is a record for the area.
-Singapore Airline''s Airbus A380 flight from
Singapore to Sydney failed to take of on Monday night due to a
defective fuel pump. The passengers eventually made their way to
the Australian city on two Boeing 747 aircraft.
- Singapore ''s benchmark Straits Times Index <.FTSTI> gained
2.47 percent to 3,000.19 points on Tuesday.
- The Dow Jones Industrial Average <.DJI> fell 0.13 percent
to 12,532.60 points and the Nasdaq Composite Index <.IXIC> gained
0.61 percent to 2,341.05 points.
(Reporting by Tan Wei Xin; editing by Kevin Lim)
((weixin.tan@reuters.com; +6 6403 5667; Reuters Messaging:
weixin.tan.reuters.com@reuters)
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