Olam: A time bomb?

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.

First REIT: 30,900,000 new units.

First REIT is having a private placement, issuing 30,900,000 new units at 95c each. This is to help pay for acquisitions announced earlier in September.

How will this impact existing unitholders?

Other than the advance distribution for the period 01 October to 25 November which is nice to have, existing unitholders' interest in the trust is going to be diluted.

The REIT has approximately 632,645,000 units in issue. The 30,900,000 new units will add 4.88% to the total units in issue.  Based on an estimated pro forma DPU of 6.77c, post acquisitions, the DPU post private placement is estimated to be 6.455c or 1.614c per quarter.

In 3Q 2012, the DPU was 1.68c. Annualised, it gives us 6.72c. So, unit holders seem to be better off pre acquisitions and private placement. We are likely to see a 3.93% reduction in DPU in future.

At a price of $1.02 per unit, I now estimate a distribution yield of 6.32%. If unit price should decline to 95c which is what the private placement's investors would be paying, distribution yield would be 6.65%.

The advantage of the private placement is that it would strengthen the balance sheet of the REIT without incurring hefty costs which would come with a rights issue as the amount raised is not big. However, the expected dilution and a possibly lower DPU in future is unpalatable.

See announcement: here.

Related posts:
1. First REIT: Acquisitions in Manado and Makasar.
2. First REIT: 3Q 2012.