Olam plans to raise funds again following the recent S$437mn equity dilution and S$940mn credit facilities last week. As the company shifts from an asset-light to an asset-medium model, we expect the pace of capital dilution to pick up along with its growing capex and working capital needs. We estimate that Olam’s current war chest stands at around S$1.6bn, which will likely go towards further inorganic expansion.
The issuance of convertible bonds (Exhibit 1) could save around S$12-18mn pa in near-term interest expenses. However, we look for dilution in the range of 7.9-9.7% of the implied share base. Olam already has some US$141mn in CBs at a conversion price of S$1.65/share. In the case of non-conversion, the new CBs could represent PV liability of S$0.24-0.30/share.
A positive facet of the issuance for Olam is the long-term financing arrangement as well as the lack of a put option for the bondholders.
Olam also announced the acquisition of a 14.35% stake in New Zealand Farming Systems Uruguay (NZFSU) for US$9.9mn. NZFSU (listed, with a market cap of US$69mn) has upstream dairy operations in Uruguay. In FY09F, NZFSU reported a net loss of US$45mn. Olam’s management expects NZFSU to turn profitable in a couple of years.
We believe that investors may be concerned about the relatively small size and minority nature of acquisitions, since they seem to be financial investments rather than strategic ones. Our NEUTRAL call stands, as we believe valuation is stretched and the shares are already pricing in near- to medium-term earnings growth. Further, the constant issuance of paper to meet capital needs is likely to remain an overhang.
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