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Singapore Credit Guide Olam International Ltd

Version 1 | Bloomberg: OLAMSP Corp | Reuters: N/A Refer to important disclosures at the end of this report

DBS Group Research. Fixed Income 22 Mar 2017

Analyst Simon JONG [email protected] Gearing on the rise

Bond Recommendation (Indicative Mid Price / YTM): What’s New: (A) OLAMSP 6% 8/2018 - SGD103.55 / 3.37% Strong OCF for FY2016 mainly on the back of higher revenues, (N) OLAMSP 5.8% 7/2019 - SGD104.25 / 3.86% margins and lower working capital requirements. OCF increased (N) OLAMSP 4.25% 7/2019 - SGD100.85 / 3.86% on the back of c.8.1%yoy increase in revenues and EBIT margins (A) OLAMSP 6% 10/2022 - SGD104.65 / 5.03% which increased to c.3.72% (FY2016). Confectionery and Food (A) OLAMSP 7% PNC2017 - SGD101.2 / 4.15%ytc contributed largely to the increase.

Key F/S & Credit Metrics (SGDm) Gearing ratios (D+P)/E has climbed through FY2016 most recently from c.2.96x (3Q16) to c.3.1x (4Q16). In March 2017,

FY Dec FY13A FY14A 2015A 2016A Olam issued a new USD300m 5y bond, assuming a USDSGD of YTD 1.42, c.SGD426m worth of debt could be added, which could Revenue 20,802 19,422 19,053 20,587 take the gearing to c.3.19x on a pro-forma basis. EBITDA 991 999 806 1,119 EBIT 791 784 524 766 EBIT (incl assoc, misc) 998 1,253 537 849 Debt maturity profile is concentrated with c.44% or c.SGD6b NPAT 392 641 (111) 339 debt being short-term, which does not include the OLAMSP 7% Cashflow from Operations 647 122 (77.8) 920 PerpNC2017. Part of the concerns could be mitigated by the Capex (960) (262) (2,084) (1,308) unutilised bank lines which stands at c.SGD7.4b. (313) (139) (2,162) (388) Free Cashflow to Firm Interest Exp (incl cap, perp) 567 573 608 463 EBITDA Margins (%) 4.8 5.1 4.2 5.4 Expect upcoming redemption of OLAMSP 7% PNC2017 in EBIT Margins (%) 3.8 4.0 2.8 3.7 September 2017. NPAT Margins (%) 1.9 3.3 (0.6) 1.6 Return on Capital (%) 5.0 2.5 3.7 3.7 Blue-chip Shareholders like Temasek (c.52%) and Mitsubishi

Cash and cash equivalents 1,591 1,590 2,143 2,144 (c.20%) advantageous from a financing and an operating Receivables 2,373 1,613 1,495 1,656 perspective. Inventories 4,154 4,686 6,692 7,414 Biological Assets 782 342 336 451 Collaboration with Mighty Earth and ME’s agreement to Plant, Property and Equipment 3,428 3,910 4,722 5,367 suspend campaign against Olam is positive. Total Assets 15,384 16,307 20,855 23,469 ST Debt 2,966 4,504 5,512 5,983 LT Debt 5,883 4,836 6,782 7,688 Bondholder Perspectives: Perpetuals (treated as Debt) 277 237 238 930 Credit metrics were mixed over FY2016. Our main concern Total Debt (Adj for Perps) 9,125 9,577 12,531 14,601 going forward is centred around Olam’s increase in gearing Total Equity (Adj for Perps) 3,547 3,985 5,082 4,704 which we believe was mainly driven by a mix of acquisitions and

Ratio FX translation. It is important to note that based on current EBITDA Int. Coverage (x) 1.7 1.7 1.3 2.4 market yields, market has priced in a funding discount for Olam EBIT Int. Coverage (x) 1.4 1.4 0.9 1.7 owing to its shareholders - generally the bonds trade closer to a Debt/ EBITDA (x) 9.2 9.6 15.5 13.0 Debt/ EBIT (x) 11.5 12.2 23.9 19.1 TLC credit spreads with some premium in view of the credit Debt/ Equity (%) 257.3 240.3 246.6 310.4 metrics (vis-à-vis other TLC bonds). We prefer Olam’s SGD Net Debt/ Equity (%) 212.4 200.4 204.4 264.8 bonds over the USD bonds given the maturity adjusted Asset Cash/ST Debt (%) 53.6 35.3 38.9 35.8 Swap Spread (“ASW”) spread premium of c.80-90bps over the Cash + CFO/ST Debt (%) 75.5 38.0 37.5 51.2 equivalent spreads/yields offered by the USD bonds (swapped Source: Company, DBS Bank to SGD terms). We think there is still value in the OLAMSP 6% **Note: FY13 and FY14 are based on financial year ending in 10/2022, given it is one of the highest yielding TLC papers on June, whilst 2015 and 2016 are based on financial year, 12 ASW basis. months ending in December. Interest Expense for 2015 and

2016 do not include capitalized interest. Areas to Watch: (i) Gearing trends, (ii) Capital Expenditures and Acquisitions and (iii) demand and supply trends.

Credit Guide Olam International Ltd

CREDIT METRICS  (-) Debt maturity profile is concentrated with c.44% or  (+) Strong OCF for FY2016 mainly on the back of higher c.SGD6b debt being short-term, which does not include revenues and margins and lower working capital the OLAMSP 7% PerpNC2017. We also note that requirements. Olam’s OCF improved from c.-SGD77.8m commodity trading firms typically have a higher proportion (FY2015) to c.SGD920m (FY2016) mainly on the back of of short term debt which could include revolving credit c.8.1%yoy increase in revenues to c.SGD20.6b and EBIT facilities (1-2y maturity) and other trade finance facilities. margins which improved from c.2.75% (FY2015) to c.3.72% (FY2016). Two segments, (i) Confectionery and  (+) Expect upcoming redemption of OLAMSP 7% PNC2017 beverage ingredients (“Confectionery”) and (ii) Food in September 2017. On 8 February 2017, Olam announced staples and packaged foods (“Food”) largely contributed to its intentions to repurchase up to SGD235.8m worth of the the improvements for FY2016 as the Confectionery and OLAMSP 7% PNC2017 outstanding through a tender Food revenues increased c.12.4%yoy and c.13.3%yoy exercise conducted between 1 March – 7 March 2017. It is respectively. EBITDA margins increased from c.4.74% unstated why Olam had decided to conduct a tender as (FY2015) to c.5.28% (FY2016) for Confectionery and opposed to exercising the call option which would have increased from c.3.93% (FY2015) to c.5.4% (FY2016) for been exercisable as of 1 March 2017. In any case, the Food respectively. From an EBITDA perspective, Edible nuts, announcement also mentioned that regardless of the Spices and Vegetable Ingredients (“Nuts”) saw a c.- tender results, Olam intends to exercise the call option to 15%yoy contraction due to lower revenues and margins call back the remaining outstanding OLAMSP 7% (weak contribution from Almond and Tomato Processing) PNC2017 on the next call date, 1 September 2017. We whilst Industrial Raw Materials segment (“Industrial”) saw have viewed the tender and intention to call back the perp a c.-27%yoy contraction due to margin pressures in Cotton positively given the (i) high cost of the perp and (ii) potential and Wood products. For FY2016, Olam had the benefit of opportunity for the company to deleverage (and bring lower working capital requirements of c.-SGD228m (vs down gearing from record highs). c.-SGD996m in FY2015) which supported the improvement in OCF position for the group.  Collaboration with Mighty Earth displays Olam’s willingness to adopt best practices in forest conservation  (-) Gearing ratios (D+P)/E has climbed through FY2016 and sustainable agricultural development. On 21 February most recently from c.2.96x (3Q16) to c.3.1x (4Q16). This 2017, Olam announced that it has agreed to take a number was primarily due to net debt issuance of c.SGD139.5m. of steps in exchange for Mighty Earth to suspend their Moreover, we believe translation effects (due to a weaker current campaign targeting Olam’s oil palm and rubber SGD over 4Q16), which has resulted in an aggregated operations for a year including its complaint to FSC. The increase to the debt and perp base of c.SGD1.1b between steps taken by Olam include (i) suspending further land 3Q16 and 4Q16. Both effects have outweighed the clearing of forest in Gabon for Palm and Rubber Plantations c.SGD158m increase in equity base, which explained the for a year, (ii) Olam together with Mighty Earth will support increase in gearing qoq. For FY2016, Olam reported an a multi-stakeholder process to develop specific criteria for aggregated increase in debt and perp of c.SGD2.1b responsible agricultural development, (iii) implement time- including the net issuance of debt and perp totalling bound plans to map, disclose more information about third c.SGD1.2b and the residual c.SGD897m potentially from party supply chains in Asia and require third party translation effects. The equity base (excluding perp) has suppliers to adhere to High Carbon Stock Approach, (iv) also contracted c.-SGD378m, mainly due to translation publish its procedures to address supply chain risks, (v) issue adjustments (captured under other comprehensive a grievance procedure that includes Olam’s third party oil income), dividends and repurchase of shares. As a result, suppliers and protects the anonymity of those providing gearing has increased from c.2.47x (FY2015) to c.3.1x input and (vi) supplement current sustainability policies (FY2016). We note that the current gearing is possibly the with explicit references to protecting peat and ensuring no highest since FY10. exploitation of workers or local communities. We view this development positively, given the suspension of the In addition, Olam issued a new USD300m 5y bond in March campaign against Olam. The announcement also displays 2017. Assuming a USDSGD of 1.42, c.SGD426m worth of Olam’s willingness to take steps to ensure sustainability in debt could be added, which could take the gearing to its business practices and the company’s maturity in c.3.19x on a pro-forma basis. addressing challenges made by non-governmental organisations.

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Credit Guide Olam International Ltd

 (+) Unutilised bank lines c.SGD7.4b can be utilised to refinance/bridge c.SGD6b worth of short term debt that frequently needs to be rolled over due to the nature of the business.

 (+) Blue-chip Shareholders like Temasek (c.52%) and Mitsubishi (c.20%) advantageous from a financing and an operating perspective. Despite the lack of an explicit financial guarantee extended by Temasek on Olam’s debt obligations, we believe that the bond market and banks have priced in a discount on Olam’s funding costs with consideration of its shareholders, especially when we consider the group’s standalone credit metrics and fundamentals. Outside of the attributed sponsorship which could have brought down the group’s financing costs, we would argue that Temasek and Mitsubishi might also contribute strategically to the group’s operations. Overall, we view the presence of Temasek and Mitsubishi as shareholders positively from a credit perspective.

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LEGEND

Definitions Either one or more criteria met within each rating category: Attractive 1) Bond is expected to outperform other bonds in given peer group over next 12 months AND/OR 2) Identifiable catalyst which could lead to bond yield compression or price appreciation AND/OR 3) Bond Reward-Risk Ratio ≥ 1 Neutral 1) Bond is expected to perform in line with other bonds in given peer group over next 12 months AND/OR 2) Lack of identifiable catalysts which could drive yield or price performance AND/OR 3) Bond Reward-Risk Ratio > 0.5 but < 1

Fully Valued 1) Bond is expected to underperform other bonds in given peer group over next 12 months AND/OR 2) Identifiable catalyst which could lead to bond yield expansion or price depreciation AND/OR 3) Bond Reward-Risk Ratio < 0.5

Peer group of bonds can be defined in a number of ways, including 1) reference bond benchmark (index) / subset of a reference bond benchmark (index), 2) corporate sector, 3) credit ratings, 4) maturity, 5) similar sponsors (in the case of government linked entities), etc. Analyst(s) should clearly reference where/if possible. Bond Reward is defined as the analyst's expected returns, which is the combination of both 1) expected coupon yield and 2) expected capital appreciation over the defined investment horizon, i.e. 12months unless otherwise stated, in view of the analyst’s investment thesis Bond Risk is defined as the analyst's expected capital at risk (of loss) over the defined investment horizon, i.e. 12months unless otherwise stated, in the event the investment thesis is wrong.

Completed Date: 22 Mar 2017 09:12:11 (SGT) Dissemination Date: 22 Mar 2017 10:39:23 (SGT)

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Credit Guide Olam International Ltd to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 22 March 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, their subsidiaries and/or other affiliates do not have a proprietary position in the security recommended in this report as of 28 February 2017.

2. DBS Bank Ltd performs or is expected to perform market making activities in fixed income securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. Compensation for investment banking services:

Compensation for investment banking services: DBS Bank Ltd., their subsidiaries and/or other affiliates have received compensation, within the past 12 months, and within the next 3 months received or intends to seek compensation for investment banking services from Olam International, as of 28 February 2017.

4. DBS Bank Ltd., their subsidiaries and/or other affiliates have managed or co-managed a public offering of securities for Olam International in the past 12 months, as of 28 February 2017.

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