Olam: Acquiring dairy farm operations in Uruguay

Acquiring dairy farming operations. Olam announced the acquisition of a 14.35% stake in New Zealand Dairy Farming Systems Uruguay (NZFSU), an operator of large scale Kiwi-style dairy farming operations in Uruguay. Olam will purchase this stake for a cash consideration of NZ$14.37m (US$9.88m). We rate this acquisition positively. However, given the uncertain outlook for the industrial raw materials segment (27% of total net contribution), we maintain out NEUTRAL call on Olam. Our S$2.48 target price is derived from DCF valuation.

NZFSU is on the way to be a major milk producer in Uruguay. NZFSU applies NZ’s high performing pastoral-based farming systems to extensive areas of Uruguayan farm land for dairy farming. NZFSU currently owns 36,300 hectares of dairy farm land. NZFSU produced 44.6m litres of milk in the financial year ended 30 Jun 09 and expects to produce 80-85m litres in FY10. When all its farms are developed by Jun 2012, NZFSU will supply close to 20% of milk produced in Uruguay.

The acquisition is in line with Olam’s Dairy Products strategy, which includes participation in dairy farming in low cost origins.

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