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Olam: A time bomb?

Wednesday, November 21, 2012

The high profile standoff between Muddy Waters and Olam is not about something new. Earlier this year in June, I wondered at Olam's share buy backs as well. I blogged about it and attached a section of research done by Kim Eng on the company then.

What Muddy Waters has said does make sense and Olam has to focus on its business rather than its share price.

Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached – particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam’s lenders.  - Taken from Muddy Waters' open letter to Olam.

To read the letter in full, go to Muddy Water's website: here.

So, is Olam going kaput in time? I know that Sunny Varghese was at the helm of Cityspring Infrastructure Trust. I was not impressed with that entity and was lucky enough to exit with a small gain. Is he able to do much better with Olam?

Short sellers could home in on Olam in time and it would be interesting to see how things turn out.

Related posts:
1. Olam: Share price up on buy backs.
2. Cityspring Infrastructure Trust: Rights issue.


FoodieFC said...

I agree with you too. And I was surprised when the share rose up to 1.70 today. Would have thought that it would drop lower!

AK71 said...

Hi FoodieFC,

Olam's management is quite aggressive in defending the share price. So, it could scare away the short sellers for now. I wonder if the effect would last.

JCK said...

Muddy waters are nasty naked shorts fraudsters. i had an experience of them doing the same to a company i invested in.

AK71 said...


Fraudster? Really? Wow!

I read in The Business Times rather good things about them yesterday.

Anyway, let's see if they have bitten off more than they can chew this time. ;)

AK71 said...

Block's assessments of companies are closely monitored; Chinese timber supplier Sino-Forest Corp filed for bankruptcy protection after a 2011 Muddy Waters report questioned the value of its assets.

Other analysts have also noted that Olam's accounting practice on biological gains may be similar to Sino-Forest.

CNA, 21 Nov 12:
Olam initiates legal action against Muddy Waters

JCK said...

In Silvercorp's case, MW used a link to an Anon site called AlfredLittle which spreaded the rumours about Silvercorp, broad brushing it as Sino forrest as being a fraud chinese stock.

Silvercorp is not even Chinese, although its operations is in China. Its incorporated in Canada.

Silvercorp has managed to identify the Anon website operator and instigating a lawsuit at the moment.

But Silvercorp stock has been battered since the Sep 11 short selling by these fraudsters.

AK71 said...


When I see MW, I think of MusicWhiz. ;p

I hope you were not too affected by the Silvercorp incident you mentioned. Terrible.

JCK said...

Was affected badly. The stock as trading at $9 before this. Now its around %5.5.....still receiving Divs though... :)

MW reply to Olam....bit long

To Olam CEO Sunny Verghese and the Board of Directors:

In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours - not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters's opinion that Olam is at risk of collapsing due multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a "fly-by-night company". It has further evidenced a bizarre fixation on baseball caps.

Olam's disproportionate reaction is extraordinary in our experience. Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached -- particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam's lenders. We also note Olam's attempts to impugn our credibility.

You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.

JCK said...


Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam's mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.

We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.

We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.

Warmest Regards,
Muddy Waters, LLC

AK71 said...


Er... In this blog post, I already provided a link to the open letter by Muddy Waters. ;)

Anyway, I believe Muddy Waters raised a few good points although their motives are probably not altruistic. Olam needs to take a hard look at its level of indebtedness, if nothing else.

Gearing of 200+% and negative free cash flow year after year. I wouldn't touch it with a 5 feet pole. I am surprised some analysts say it is still a BUY.

I am sorry about your paper loss in Silvercorp but it will make a come back if its fundamentals are good. All in good time. :)

AK71 said...

We believe Olam 2QJuneFY13 results were slightly below market expectation, but in-line with ours. Net profit excluding exceptional gains was up just 6% yoy to SGD136.1m, bringing 1HFY13 to SGD179.2m. Stripping out biological gains, 1HFY13 net profit comes to SGD147m, against full-year consensus of SGD347m.

We believe the weakness in profit continues to stem from the increasing debt and overhead loads. Employee benefit expenses for the quarter were up 33% yoy, while finance cost continues to balloon, up 36% yoy. To put this into perspective, finance cost of SGD131.4m was similar to net profit. Net debt to equity went up significantly this quarter, to 252% (adjusted net debt/ equity 68%, which is the highest in history). This risk continues to be front-loaded over the next 18 months in our opinion, with estimated capex of SGD1.7b and SGD3.9b debt to be repaid/ rolled over.

We do not see reason to own the stock, given risk associated with refinancing in the next 18 months. We keep our estimates unchanged, which are still below market consensus. We also think it is prudent to factor in the new warrants which are now theoretically in the money and will account for 16% of existing share capital. We maintain our TP of SGD1.30, pegged to 12x FY13F.

Maybank KimEng, 8 Feb 13.

AK71 said...

Olam splashed through muddy waters. Noble collided into an iceberg!

NOBLE Group, which halted the trading of its shares on Thursday after Iceberg Research launched its second litany of allegations against the commodity trading firm, said its auditors Ernst & Young have requested for more time to review their own internal processes before signing off on the group's annual accounts.

Noble stressed the allegations are without substance and that it would be comfortable proceeding with the publication of the 2014 year end results on Thursday evening as scheduled.

"However Ernst & Young have said that they require more time to review their own internal processes in the light of the third party allegations before signing off on the accounts. They have undertaken to conduct their review as quickly as possible,'' Noble said.


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