Olam

Olam: fully owned dairy farming subsidiary New Zealand Farming Systems Uruguay is investing US$80m in new dairy processing facility in central Uruguay. About US$5m will be used to buy up 94% stake in a Uruguay-based company so as to acquire land, licenses and permits for the construction of the plant. The new plant is to commence operations in 2017 to produce a range of dairy products from milk powder to butter. With an initial daily capacity of 600k litres per day, production will eventually be ramped up to 1m litres per day. Products will be distributed to neighbouring countries, Eastern Europe and Africa to as far as Russia and Middle East. As part of its mid-term strategy to optimise balance sheets to focus on more profitable projects, Olam has been freeing up resources from underperforming dairy projects. Recall, the company divested its diary processing plant in Cote d’Ivoire for US$18.7 to Royal Friesland earlier this month. In April, the company monetized its dairy farmland in western and eastern Uruguay for US$53.7m cash via a sale and leaseback agreement. Management expressed optimism in this new venture, saying the expansion into midstream processing will be a “prized integrated farming and processing model that will truly leverage Uruguay’s comparative advantages and unlock the full intrinsic value of the assets in the business”. Nonetheless, our house believes that foreseeable positives are already priced in, with Olam trading at ~15% premium to its peers. Further benefits coming from the success of its restructuring efforts will be stock catalysts. Meanwhile, Maybank-KE recommends Hold on Olam with TP $2.52.