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Temasek offer a sector re-rating event: Barclays

Option for large shareholders to step in cannot be ignored

SINGAPORE investment company Temasek Holdings' offer for Olam International could be a sector re-rating event, reflecting the potential for major shareholder groups to step in if soft commodity groups remain undervalued, said Barclays.

This is especially since equity markets are too concerned with quarterly earnings numbers - often affected by volatile commodity markets - while strategic shareholders can take a long-term view on the key drivers of the business.

"The long-term drivers of constrained upstream productive resources and demand growth in emerging markets are secular trends, irrespective of the volatility in commodity markets," said Barclays analysts in a report. "In our view, Temasek's offer for Olam may reflect the potential for other shareholder groups to step in if they believe the equity market is not pricing in the earning potential."

Noble Group is 14 per cent owned by China sovereign wealth fund China Investment Corp while Wilmar International has 16.4 per cent held by US-based agri-commodities trader Archer Daniels Midland (ADM).

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"If the equity market is unwilling to re-rate it, large shareholders may just step in, and we think that optionality is not to be ignored," said Barclays.

Noble Group is now in talks with a consortium including Cofco Corp - the largest grain trader - to form a joint venture around its agriculture business. The stock of Noble has risen 15 per cent since Feb 5, closing at $1.075 yesterday.

Wilmar, when asked about its partnership with ADM during its results briefing last month, said that both share a "very close" relationship. "(But) unless conditions for marriage is good, we'll just work closely together," said chief executive officer Kuok Khoon Hong. "Right now, the conditions for marriage is not right, so we'll still prefer to be single."

ADM and Wilmar have worked together since the 1990s when both jointly built a network of soyabean processing operations in China. They have also entered into a partnership in global fertilisers, European vegetable oil and global ocean freight.

The Kuok family owns 18.3 per cent of Wilmar, which has gained 11 per cent in its price since Feb 5. The stock ended two cents higher at $3.47 yesterday.

Meanwhile, OCBC yesterday joined many other analysts in advising investors to accept Temasek's offer, or to sell in the market if the share price goes above the offer price.

"While things are moving in the correct direction, the medium-term outlook for commodities, especially hard commodities, continues to remain quite challenging in our view," said OCBC analysts Carey Wong and Andy Wong. "We also do not expect to see a competing offer for Olam."

Citi Research, however, said in a note last Friday that it does not expect a high success rate for the offer, given that Olam is currently midway through working its asset portfolio towards full contribution.

After Temasek Holdings and Olam's founding firm Kewalram Chanrai Group, fund management firms Orbis Group, Alliance Bernstein and Capital Group are Olam's other large shareholders, holding 8 per cent, 6.7 per cent and 5 per cent of the firm respectively.

Olam shares rose one cent yesterday to close at $2.22, below the offer price of $2.23.