Tuesday, June 12, 2012

Olam

Olam: Citi maintains Buy with $3.10 TP following Olam’s recent share buy-back program. House note that Olam’s P/E valuation is now at similar lows to those seen during the GFC due to various hits that Olam (and the sector) has encountered in the past few qtrs as well as increased gestation period on some of its fixed-asset linked investments. In contrast, Olam's debt is trading close to par vs large 40-50% discounts seen during the GFC. Olam repurchased debt in 1H09 during the GFC period, which helped mark the bottom for equity valuations then. This cycle, while grp is watching the trading yields on its debt carefully, it believes that it is better off investing in operational projects vs debt buybacks at current values. Olam has more options this cycle as its more lowly geared this cycle, with adjusted net gearing of 0.4x which leaves it room to fund further debt or equity buybacks, after raising $740m in new equity in June 2011. Current gearing level also favorable vs 0.7x in at end FY08 during GFC period. House note that equity investors likely prefer debt buybacks at substantial discount as the reduced debt burden is seen as a tangible benefit and the benefits also flow thru the P&L, while the opinion on the benefit of an equity buyback can be diverse.

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