How will the massive Mitsubishi deal affect Olam?

Its share price is unlikely to jump further.

Olam’s share price jumped last week prior to and after the revelation of a $1.5b investment by Mitsubishi Corporation. Although the deal is positive in the medium term, analysts note that Olam’s current share price is quite costly given commodities outlook remains muted.

“Mitsubishi’s price for Olam is on the high side against peers such as Wilmar,” said Maybank Kim Eng analyst Wei Bin. “After strong share-price performance in the last two days, positive catalysts have been priced in.”

Wei said that after the deal, Olam will be 51% owned by Temasek, 20% by Mitsubishi, 6% by management and 4.8% by KCG. Its free float will drop to 17.5%.

OCBC analyst Carey Wong said that the issue price of $2.75 per share is about 29% above the 12-month volume weighted average price (VWAP) and also nearly 50% above its VWAP on August 26, during which stock gained 13.4%.
“We note that this prices Olam at 18x FY14 core EPS, which in our view is quite pricey, given the still-muted outlook for the commodity market in general. And at this point, we do not expect MIT to increase its stake further, hence the share price is unlikely to close the gap,” Wong noted.