Olam's gearing should fall from 2.51x to 1.52x post the exercise, with adjusted gearing at 0.3x, versus 0.83x previously. Olam had cited an inadequate access to long-term funding as limiting the scope for M&A, despite a strong deal pipeline. With capital raised, Olam’s M&A initiatives have thus been reactivated.
We are pricing in S$1.3 bn of acquisitions by FY12E, with S$900 mn funded by debt, and have assumed a blended P/E of 15x, excluding synergies. After adjusting for the equity dilution, our EPS forecast rises by 3-4% through FY12E.
With medium-term growth prospects now likely to achieve Olam’s 25-30% earnings CAGR guidance, and another fund-raising unlikely in the next 18-24 months, we raise our DCF-based target price to S$2.70 (from S$1.95), and rating from Neutral to OUTPERFORM.
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