Opportunistic acquisition reaps synergy. The acquisition is a bargain at US$39m vs. its replacement cost of US$130m. Assuming net profit margins of 5%-9%, the deal is priced at an undemanding 2.2x-3.9x PER. Olam expects this acquisition to accelerate its entry into the US tomato processing industry, given that SK Foods was a dominant player ranked 2nd among US tomato processors and top 5 globally. With a processing capacity of 1.5m tons, its output accounts for 14% of the US market share and 5% of the global market share. The acquisition is expected to reap synergies on several fronts. For instance, it not only enlarges Olam's customer base, but also allows Olam to cross-sell tomato products to its existing customers. Other synergies can be derived from shared overheads and new product adjacencies.
Earnings accretive in the further future. We do not anticipate significant near term financial impact from the transaction. The acquisition is expected to be earnings accretive only from FY12 onwards and is expected to generate revenue of US$200m per year with an EBITDA margin of 12%-13% in steady state, higher than the group's current EBITDA margin of 5%. The incremental revenue translates to 3.3% of FY09F revenue. We are keeping our FY09 and FY10 estimates unchanged. Olam's share price has more than doubled since March and is trading at 26.1x FY09F PER vs. the STI's 16x, after taking into account near term dilution from its recent equity placement. Current valuations no longer provide an attractive entry level, in our view. Nevertheless, given its enhanced prospect of inorganic growth, we are keeping our HOLD rating intact. We are raising our peg to 20x (from 17x) as Olam revives its inorganic growth plans, deriving a fair value estimate of S$2.37 (previously S$2.01).
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