When will Olam's Nigeria expansion pay off?

Not this fiscal year but expect a 0.6-0.9% upside in earnings from FY13 onwards, says DBS.

Olam had recently acquired Titanium Holding Company SA, which is the second largest biscuit and candy manufacturer in Nigeria.

The acquisition is seen to be a positive move for Olam due to their production advantage and marketing leverage over smaller local competitors. DBS also considers the West African biscuit and candy market, in which Nigeria is part of, as an attractive market growing at a yearly clip of between 10 to 15%.

Here's more from DBS:

Entry into a biscuit and candy business in Nigeria. Olam announced that it had acquired a 100% interest in Titanium Holding Company SA, Nigeria's second largest biscuit and candy company for US$167m (subject to working capital adjustments at completion). The purchase price equates to 8.1x EV/EBITDA, which according to the announcement compares favourably to the last transaction in the sector done at 10.5x.

Staple and packaged food segment expanded. We view this acquisition favourably, as it allows entry into the West African biscuit and candy market – which we understand has been growing at between 10-15 p.a.. Olam notes that the competitive landscape is attractive because: (1) the majority of competition are local companies, (2) there is synergy from existing flour and sugar milling businesses, and (3) the group’s ability to invest more on marketing.

Earnings accretive transaction. Assuming EBITDA margins of c.18% by FY14 and revenue growth of 11%, we see potential 0.6-0.9% upside to FY13-14F earnings. There is limited impact on FY12F, given only 4 months contribution. We will update our numbers post results release tomorrow (14Feb12) where we expect Olam to deliver 2Q12 profit of between US $125-135m (-7% to -14% y-o-y).