We see the most important benefit of the proposed S$438m placement of 273.5m new shares to Temasek as financial – we anticipate that having Temasek as a 13.8% shareholder of Olam could improve its access to long- term debt financing, which we believe is a key factor that could help Olam’s plans to accelerate growth via acquisitions. We roll our valuation parameters onto FY10, which implies a higher target price target of S$2.10 on 17X FY10E EPS (vs S$1.70 previously on 17X FY09E EPS ex one-time gains). Neutral rating maintained.

At the analysts’ briefing today, Olam reiterated that the purpose of the fresh money is not to de-gear but rather that it will be for fresh acquisitions. While it did not offer specific or immediate M&A targets, we estimate these funds should boost earnings by 8% in FY10E, if one assumes reduced borrowings at the blended rate of 7–8% and our forecast of a nominal gearing level (inclusive of working capital it could fall by a third to about 2.0x).

However, we do not believe this would be sufficient to offset the 13.8% EPS dilution from the new shares. Temasek will now be the second-largest shareholder after its key sponsor, Kelwaram Chanrai, which will see its shareholdings dilute to approximately 23% (from 26.7%).This transaction will require shareholders’ approval at an EGM (it is expected the sponsors and the CEO [who owns 5.2%] will vote in favour of the deal).

While the immediate benefit is financial, we believe well-executed acquisitions can enhance Olam’s strategic position, especially if it helps to increase choke points on the key soft commodities supply chain that it already deals with. Olam has very significant market share in commodities such as cocoa, coffee (robusta) and cashews. Post its 2005 IPO, Olam has already been steadily acquiring and building a portfolio of strategic processing assets but has slowed its pace of acquisitions due to long-term debt market dislocations.

Earnings forecast for FY10 raised by 8%; target price raised to S$2.10. 12-month price target: S$2.10 based on a PER methodology. Catalyst: Recovery in NC/ton from the 13% YoY decline recorded for 3Q09; well-placed, ROE-enhancing M&A deals.

Olam’s shares have continued to rerate post 3Q09 results on 14 May despite concerns on its key NC/ton margin metric being weaker YoY (due to weaker volume for premium food commodities and industrial soft commodities). While we like the benefit of this shares placement, we prefer a lower entry price, especially post the more than 10% rise in the stock today.