Investors go nuts for Olam

Singapore based commodity sourcing company secures a blow out IPO.

The institutional tranche of Singapore's largest IPO of the year thus far, closed on Friday with books covered sixteen times. The company yesterday launched the retail tranche of the sale.

The IPO sees the sale of 312 million new shares and 63 million existing shares, together making up 25% of the company. The deal was priced at the top of the range of S$0.55-S$0.62, raising S$232.5 million. CLSA and DBS are joint global coordinators of the deal, with Cazenove and Nomura as co-lead managers.

The company describes itself as "a leading global supply chain manager of agricultural products and food ingredients." Essentially Olam buys 14 separate agricultural products such as cocoa, coffee, cashews, sheanuts, sesame, rice and teak wood from 12,000 suppliers upcountry in destinations such as Nigeria, Brazil, Vietnam and Indonesia. It then sells those products to global companies such as Cadbury's in 50 different countries. What makes it different is the way it engages in end to end supply of those products, while pricing them based on a fixed margin over its own costs as opposed to with reference to global prices.

The company was set up by Sunny Verghese, the present CEO, in 1989 with the help of the Kewalram Chanrai Group in Nigeria. In the mid 1990s it moved its headquarters to Singapore, attracted by a favourable tax rate and Singapore's position in the global trade flows.

In 2002 and 2003, it brought in new shareholders, firstly Russell AIF Singapore and then Temasek and the IFC. Pre-IPO the shareholding of the company was: Kewalram Chanrai Group 46%, Employees 18%, Russell AIF Singapore 14%, IFC 8.8%, Sunny Verghese 6.7% and Temasek 6.4%. As part of the shareholders agreement signed in 2003, the company agreed to go public by 2006 to allow the private equity investors to cash out.

Post IPO the shareholding structure is: Kewalram Chanrai Group 34%, employees 18%, public institutional shareholders 17%, Russell AIF Singapore 10%, pubic retail shareholders 8%, IFC 6.9%, Sunny Verghese 5.3% and Temasek 5%. There is also a 15% greenshoe that the leads may exercise in coming weeks.

The company had been on a two-week road show to Hong Kong, Singapore, London, Edinburgh, Amsterdam, Paris and Milan and books were said to be covered by the end of the first week. There was no US 144A tranche. 51% of the institutional tranche was placed to Asian investors with 49% placed internationally. According to the book runners the hit rate with international investors was "phenomenal" with only 3 out of the 80 or more one-on-one meetings declining to take the stock. In the end over 200 accounts came into the deal.

In terms of performance, Olam is said to have posted profit growth of 39% each year for the last three years and consistently earns a return on equity of over 30%. Thus with the shares priced at the top of the range this equals a valuation of about 16 times 2004 earnings.

The nearest comparable to Olam is Noble Group, the Hong Kong headquartered but Singapore listed global commodity trading company. Officials at Olam stress that the business model of Olam is very different from that of Noble, in particular they note that Olam's prices have little to do with freight rates where Noble's business is very much centered around its shipping activities. Investors clearly bought into this argument as they were willing to afford Olam a valuation much higher than the 7.75 times earnings that Noble is trading at now.

"Olam's IPO has been hugely successful," said Edward Slade, Head of SE Asian Equity Capital Markets at CLSA. "The strong book and quality of demand for the deal is a reflection of the very high quality of management, with an exceptional team of people at the top. 1:1s and road show meetings generated genuine excitement, as investors were delighted to find a Singapore mid-cap with great growth prospects and management better than most blue chips. Companies of this quality are extremely rare".

The public offer is expected to close on February 7 and trading in the stock starts on February 11.

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