HSBC upgrades Olam International (O32.SG) to Overweight from Neutral, and keeps its target at $3.63. The house says Olam’s acquisition of Britannia Food Ingredients and its logistics business for around US$50 million ($63.9 million) will enhance Olam’s presence in the entire cocoa supply chain by including processed cocoa products. 

“This deal augments Olam’s excess returns strategy with management forecasting 34% ROE at steady state (expected FY12). The house estimates that BFI will deliver $9 million-$10 million PAT at steady state, resulting in a 2.0% uplift to the house’s FY12 estimates: “not material.” 

 

It says at 18X FY11E earnings, “Olam is trading in line with its peers, while historically the stock has averaged a 16% premium. Olam is also at a 10% discount to its historical mean P/E, when improving global demand conditions and Olam’s past investments reaching steady state means the Group is set to deliver 27% on-year earnings growth” compared with just 13% on-year for HSBC’s Singapore universe. 

 

Shares are up 1.6% at $3.09.