Thursday, October 24, 2013

Olam International : Takeaways from Africa (Citi)

Olam International
Price (21 Oct 13) S$1.51
Target price S$2.60

 Olam’s African operations in Nigeria and Gabon – We visited several of Olam’s assets in these two countries. We saw assets in tomatoes paste processing (Tasty Tom), flour milling (Crown Flour Mills), and biscuits manufacturing (OK Foods) in Nigeria as well as a rice farm (Africa’s largest at Nasarawa, Nigeria) and Olam’s young palm plantations in Gabon. We also visited the site for the proposed urea fertilizer plant at Gabon’s Port Gentil as well as the Special Economic Zone (SEZ) project at Nkok. Below are some key takeaways.

Leverage on demographics – Much of Olam’s food processing/food growing activities taps upon the rapidly growing population in West Africa; e.g. Nigeria’s 175m population is growing at 6% and thus it needs imports in staples like rice and wheat. Since its acquisition in 2010, Crown Flour Mills has since nearly doubled its capacity to 0.7mt. from 0.4mt. Crown Flour Mills is Nigeria’s third-largest wheat brand and Olam is also Sub-Saharan Africa’s top 3 importer. The mill uses Bulher equipment from the US and is highly automated. Its tomatoes paste processing plant started in 2012 and is already the second-largest brand. OK Foods is Nigeria’s second-largest biscuits and candy brand and Olam is working to improve its distribution reach and product range to grow further. On rice - Nigeria has more than 84m ha of arable land: utilization is a low 40%. Olam is leveraging technology and large scale at its US$50m rice farm in Nasarawana, Nigeria and expects to scale fully to its target of 6000 ha by the end of 2014 (vs 1000 ha in 2012).

Riding on moves to industrialize Africa – With its GDP highly dependent on oil, Gabon plans to diversify and create jobs through industrialization. Gabon also has plans to grow agri resources sustainably to help supply materials to its industries. Gabon is executing on a petrochemical hub at Port Gentil, its second largest city as well as a processing hub at Nkok, an area about 30km east from its capital Libreville. Olam has partnered with Gabon’s government in 4 key projects – a urea fertilizer plant at Port Gentil (it is 99% done with site reclamation works by Boskalis- Van Ord), Nkok SEZ project (three-quarters sold out), a 50,000ha palm plantation project (it has planted 7,000 ha and is on track to nearly double this to 13,000 ha by 2014), and a 28,000ha rubber plantation project.

Sustained execution on these assets key – While Olam has progressed well with these assets, investors are watching Olam’s overall execution of gestational assets. While it has nearly S$10bn in invested capital across four operating segments (Fig 6), executing on the S$3bn classified as partly contributing/gestating will be key toward investors rerating the stock. Moves to illustrate focus on core agri-linked activities will also be helpful. E.g. Olam is working on adding strategic partners for its ~US$1.3b urea fertilizer plant in Gabon. We continue to believe in Olam’s ability to execute on its strategies and successful execution is a rerating driver from its current valuations, which are similar to GFC lows.

Our target price for Olam of S$2.60 is based on a 12-month forward price/book multiple of 1.6x derived from our Gordon Growth based framework in which we assume a long-term growth rate of 4.0%, a sustainable ROE of 14.0% and a cost of equity of 10.2%.

Downside risks that could prevent the stock from achieving our price target include: 1) a sharp decline in credit markets or other factors that could constrict trade volumes; 2) an inability to refinance debt as it matures; 3) poor execution, which leads to lower-than-expected returns on its investments in plantation assets and midstream processing assets. Its US$1.3b fertilizer project in Gabon is of special interest given its size within Olam's asset base.

Source/Extract/Excerpts/来源/转贴/摘录: Citi-Research,
Publish date: 22/10/13

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