• Ready to capitalise on opportunities. Olam International is set to continue expanding through acquisitions as net gearing is likely to improve significantly this quarter. Net gearing will be reduced due to:

a) an estimated 6-10% qoq reduction in agri-commodity prices resulting in lower short-term debt requirements, and b) the completion of its preferential offering and placement in July. Based on the new equity raised, net gearing could improve from 2.5x in 4QFY11 to 1.8-1.9x this quarter.

• Tightening grip on NZFSU. Last Friday, Olam’s 85.93%-owned New Zealand Farming Systems Uruguay announced that it will be raising US$120m through a rights issue. Olam has indicated it will take up its share of the rights issue and seek shareholders’ approval to increase its relative stake in the company if minority shareholders choose not to take up the rights issue.

Stock Impact
• Position of strength. Olam’s equity raising in July (at S$2.56-2.60/share) seems to have been perfectly timed for the recent rout in the stock and commodities market. We estimate that the group will have sufficient debt capacity for funding of up to S$1.5b of acquisitions and new investments over these two years. With its current balance sheet, Olam can capitalise on opportunities as they arise from volatile markets as it did following the 2008/09 financial crisis (eg Australian almond orchards in 2009).

• Raising stake in NZFSU. The rights issue for NZSFU would require its shareholders to come up with a cash amount of almost double the value of their investment. As the funds will be used to repay a shortterm debt facility extended by Olam, the rights issue could allow Olam to raise its stake in NZFSU without significant impact to cash flow at the group level. We estimate NZSFU could contribute 10-15% of Olam’s net profit growth for the current FY.

Earnings Revision/Risk
• No change to our earnings estimates. Key risks are financing and counterparty risks if a full-blown financial crisis develops. Olam traded at approximately 9x core earnings at the depths of the 2008/09 financial crisis. This would imply a valuation of S$1.60 based on our earnings estimates. However, we note that the company’s gearing is significantly lower while the scale of its operations has almost doubled over the period.

As such, the stock is not likely to reach such levels in our opinion.

Earnings should also remain relatively resilient at about three-quarters of its commodity portfolio consist of food commodities with inelastic demand.