Olam invests US$240m for first sugar milling asset in Brazil

Management however sees no immediate financial impact amid week sugar outlook.

Olam International Limited (Olam) plans to spend US$240m for its first sugar milling asset in Brazil; this by acquiring Usina Acucareira Passos (UAP) for US$129m and investing an additionalUS$111.5m capex over the next five years to improve its agricultural (cane growing) and industrial (milling) capacity and efficiency.

Olam intends to fund the move using internal accruals and borrowings. Olam expects the investment to deliver EBITDA margin of >30% by steady state (FY16) and generate equity IRR of >20%.

According to OCBC Investment Research,  the acquisition is integral to the firm's sugar strategy. UAP owns/operates a sugar mill in Passos with an annual crushing capacity of 1.75m MT and an output capacity of up to 200k MT of sugar per year," it said.

"Management believes the latest acquisition is integral to executing its sugar strategy of building a configuration of milling assets in large sugar-producing countries that have a comparative cost advantage. Recall that Olam had previously made several investments in sugar, including two mills in India and two refineries (one in Indonesia and one upcoming in Nigeria)," noted OCBC.

For now, management does not expect any immediate impact on its financials. Meanwhile, management also revealed that it expects the sugar surplus to persist going into 4QCY12, which should cause sugar prices to continue falling. However, it remains confident that prices should bottom after that and not affect the profitability of UAP when it reaches steady state in FY16.

"Growing uncertainty in Europe may continue to see increased volatility in commodity stocks and we do not expect Olam to be spared, although it does operate mostly in the more demand-resilient soft commodities space," said OCBC.