Olam Invests US$49m In Rice Farming and Milling Facility
Olam International will be setting up its first rice farming and milling facility for US$49.2 million. The facility, located in Nigeria, will deliver an internal rate of return (IRR) of 28%. In its press release, Olam mentioned that it will begin rice planting during the April-June period in 2012. Eugene Ng, UOB-Kay Hian analyst, feels that the farm will likely raise profit margins for Olam’s rice operations, albeit a very small increase. Olam’s investment in Nigeria comes at a time when the government there has pledged to raise rice production in the country. Olam president, Rajeev Raina, opined that its investment in rice farming and processing in selected markets will help it to “selectively get integrated in the value-chain by participating in attractive and higher margin profit pools upstream in rice farming”.
Significance: Though the IRR is high, analysts point out that the project may carry high risk as agriculture in Nigeria is subject to factors such as “pests, diseases and bad weather as well as political factor”.
Chip Eng Seng Issues Highest Bid For Alexandra Hotel Site
A tender for a hotel plot currently housing a former Safra building at Alexandra Road has drawn six bids, with the highest coming from Chip Eng Seng Corporation. The top bid values the plot of 99-year-leasehold land at $189 million or $789.19 per square foot and will mark Chip Eng Seng’s first hotel site. Chip Eng Seng’s chief executive, Raymond Chia said that the group will tear down the former Safra building and redevelop it into a three-and-a-half to four-star hotel with over 450 rooms. Chia also mentioned that while the local residential property market has been steady despite cooling measures, the firm will have completed a huge portion of its projects in the next two to three years, thus leaving a gap in its order books. The tender, if successful, would help Chip Eng Seng in its intentions to diversify into the hospitality business while boosting its recurring income.
Significance: The strong response at the tender reflects the continued strong demand for hotel rooms on the back of expected continued rising visitor arrivals in Singapore. However, there could be some pressure on average occupancy rates as hotel rooms come on-stream in the near future amidst a Eurozone crisis.
Local Property Sector More Hardy Than During Great Recession
Credit Suisse expects local asset values to be more resilient than in the 2008 Great Recession. Research analyst Tricia Song felt that while “developer uptake could slow by 12-15% on market uncertainties; we expect physical prices of properties to hold up”. Following a raft of cooling measures by the local government, Song mentioned that property speculation is likely to have been “weeded out”. In fact, the harsh stamp duty penalties that have been place as part of cooling measures, have proved to be highly effective with sub-sales falling to just 7% of all transactions. Concerns about an oversupply may also be unfounded as a relaxation of immigration policies due to a tight labour market could quell the matter by 2014.
Significance: In view of the Ministry of Trade and Industry’s forecast for the local GDP to grow at a rate of about 1-3%, the local property sector could see a slowdown as GDP and residential prices tend to share a strong correlation. However, developers generally are seen to be having lower gearing levels leaving adequate debt headroom for any attractive acquisitions that may come by.