Olam International building up a ‘huge war chest’

Event
Olam’s share price has weakened since the firm announced its $740m equity‐raising exercise on 7 June, the fifth in recent years. Though we view this move negatively, we believe the share price correction is overdone and see a good entry opportunity. With the strong likelihood of positive M&A newsflow, we maintain our BUY recommendation but lower our target price from $4.10 to $3.38.

Our View
We view Olam’s equity‐raising exercise early this month in a negative light due to the high discount offered, which we deem to be dilutive to minority shareholders. The placement to institutional investors and Temasek was done at a discount of 8.4% (compared to the 5% discount Noble offered in its March exercise). And this did not take into account the fact that the stock had been languishing in the 1‐2 weeks prior to the exercise as the market waited in anticipation.

Furthermore, Olam has raised a substantial sum of money from the market in the past three‐and‐a‐half years. It launched a total of five equity‐linked exercises, of which two were dilutive in nature.

On the other hand, management is likely to have identified attractive investment targets over and above its Gabon investments. With $740m from its latest equity‐raising and a recent $1.5b term loan (part of it likely to be for refinancing), it is building up a huge war chest. Olam’s share of equity in Gabon is about $290m. This means at least $500m from the sum accumulated may be for potential targets.