Olam

Olam: Sanyo Foods (Japan’s 3rd largest instant noodles maker) is taking a 25% stake in Olam’s Packaged Foods business for US$187.5m, pricing the deal at 2x FYJun13 P/B. Based on initial EV of US$750m, Olam will book US$167.5m in net cash inflow with an addition of US$80.8m in reserves. The price consideration could increase to US$212.5m should the Packaged Food division achieve specific performance milestones. The Packaged Food division is not a big part of Olam’s business, accounting for only 2% of Olam’s FY13 revenue. US$167.5m net cash inflow will improve free cash flow meaningfully but the impact on balance sheet is limited as net gearing will only improve by 5ppt to 179% in FY15 estimates. But in the long term, the partnership with Sanyo Foods could be an important strategic move. By leveraging Sanyo’s expertise in technology and building leadership businesses in other emerging markets, Olam’s consumer business might be able to expand faster and explore new opportunities in Sub-Saharan Africa region. The deal is expected to complete in 2QFY15. Nevertheless, Maybank KE maintains Hold on Olam with TP of $2.35 as valuations are rich compare to peers.