Purchasing more distressed assets. Olam International Ltd (Olam) has acquired a 14.35% stake in New Zealand Farming Systems Uruguay (NZFSU) for US$9.88m. The purchase is likely to be funded internally given Olam's robust cash position of S$531.3m as of end Jun 09. Priced at just 0.3x NAV, this marks another distressed asset purchase. NZFSU strives to apply New Zealand's high-performing farming systems to low-cost land. Olam sees a good strategic fit with NZFSU and aims to achieve low cost production, higher margins and stronger market position with the upstream integration of its dairy business. NZFSU's valuations are, however, depressed for a good reason. It suffered a US$45.9m loss in FY09 (ended Jun) and consensus estimates point to continued losses for the next two years. As such, it could take a few years before this acquisition turns earnings accretive. Issuance of convertible bonds paves the way for larger acquisitions.

On a separate note, Olam has proposed to raise up to US$500m (US$400m with the option to upsize by US$100m) via the issuance of seven-year convertible bonds (CB). The CBs carry a coupon rate of 6.0% and conversion price of S$3.0853. Upon full conversion, issued share capital will be enlarged by 9.4%. As we mentioned in our report dated 2 Jun 09, Temasek's S$437m equity infusion has allowed Olam to expand its debt capacity by up to US$600m. We expect Olam's enhanced capitalization to pave the way for the fulfillment of its acquisitions pipeline, and unlock inorganic growth opportunities beyond the bite-sized acquisitions that it was restricted to prior to its fund raising exercises.

Still a BUY, fair value trimmed to S$2.72. We have lowered our FY10 earnings estimate by S$27m to account for finance costs arising from the CB issue. While Olam's fund raising exercises may erode earnings and result in dilution, these are "necessary evils" needed to support Olam's continued growth trajectory. Growth via acquisitions has worked well for Olam, as demonstrated in its FY09 results where new businesses were its key growth drivers . Furthermore, the group remains committed to widen its equity and capital spreads. We remain confident of Olam's mediumterm growth plans and maintain our BUY rating on the stock. Our fair value estimate has been trimmed to S$2.72 (from S$3.08) on the lower FY10 earnings forecast.