28 Nov 2012 10:36

0236 GMT [Dow Jones] STOCK CALL: Muddy Waters' report on Olam (O32.SG) creates sensational headlines, but the issues are not fresh, CIMB says. (The report accuses the commodities trader of a litany of failures, ranging from incompetence to malfeasance; Olam strongly denied the allegations, saying "there is no substance" in the assertions.) "We think this report exaggerates the negatives, most of which are already known by the market, rather than bringing up new concerns. Muddy Waters appears to have built its investment thesis around biological-asset gains and negative goodwill, which we deem secondary as we strip them out in deriving core net profits. Borrowings are high, yes, but most are backed by readily marketable inventories, which are cash-like in nature. Heavy capex is not a new concern, either, and has been well-communicated by management. Olam may be a black box, but this is a common characteristic of supply chain managers." CIMB keeps its Trading Sell call on the near-term event trigger. It notes Olam is halted, likely pending clarification on the report, with the price falling below its S$1.59 target Tuesday, last changing hands at S$1.56. If weakness persists, CIMB tips S$1.35, its end-September book value, as the next support. 
 

REVIEW OF OLAM BY SOME ANALYST

1.        Muddy Waters has issued a 133-page report (attached) on Olam on 27 Nov with a "Strong SELL" recommendation. Key highlights of the report include: 
        a.        aggressive accounting 
        b.        potential solvency issues 
        c.        accounting credibility 
        d.        high capex 
        e.        overpayment and misleading of investors with regard to its acquisitions 
        f.        Some issues highlighted have been repeated from previous analyst reports with “SELL” recommendations, eg export incentives, accounting restatements. 
        g.        S$0 target price. Muddy has valued Olam's equity at zero and bonds at 14-33 S cents to the dollar, premised on Olam's "looming insolvency crisis". 

2.       View is that barring outright fraud, we believe their concerns could be overblown. He maintains BUY. Target price: S$2.38. 

3.        OLAM SP's view of the Muddy Waters report: 
        Olam has issued a statement that its accounting practices are fully compliant with international accounting standards, and are drawn up in accordance with the provisions of the Companies Act and Singapore Financial Reporting Standards. It will provide a fuller response in due course. Olam also intends to "hold Muddy Waters accountable for their damaging actions". 

4.        Personally, I think upside for both NOBL SP & OLAM SP is good because: 
        a.        OLAM SP likely to utilise its SGD1 billion cash reserve for future share buy-backs to catch 'SHORTISTs' 
        b.        Strong balance sheet to execute strategic plans 
        c.        NOBL SP: Looking ahead to 4Q12: soft-commodity prices slowly chugging up Cocoa, Coffee, Aluminium & carbon credits 
        d.        NOBL SP risk management process is still robust & intact 

5.        Most Fund Managers are looking at these target prices: 
                                        BUY                        Target 
        a.        NOBL SP:                SGD1.00                SGD1.60                (at SGD1.60 pre-collapse) 
        b.        OLAM SP:                SGD1.40                SGD2.30                (FMs partial that OLAM SP can overcome the -ve Muddy Waters report) 

6.        OLAMIF US collapsed +10% yesterday. Given this I am of the view that OLAM SP is likely to trade nearer SGD1.50 & sideways with downward bias to SGD1.40 until market digest OLAM SP's response. 

7.        Share price should then trade nearer SGD2.00 on the back of the following: 
        a.        Release of Muddy Waters report mitigated well by OLAM SP team 
        b.        More clarity on OLAM SP's diversified business 
        c.        Investors realise that Muddy Waters have hit-&-miss- SHORT calls (they don't have a 100% track-record) 
        d.        Short-covering on OLAM SP as shortists realise that downside is limited 
        e.        Share buy-back: OLAM SP has massive SGD4bn credit line & can buy-back up to 10% of its shares 

8.        NOBL SP medium-term outlook is positive if its Brazilian sugar mills achieve operating leverage, and its oil & gas business gains traction. In 
the near term, we believe price weakness in several commodities, namely coal, coffee, cocoa, aluminium and iron ore, as well as negative China soybean crush margins, will put a lid on Noble’s stock price. These are somewhat mitigated by strength in oil prices, which is positive for Noble’s oil & gas segment. 

9.        OLAM SP underperformance vis-à-vis the FSSTI is undeserved given its compelling prospects because: 
        a.        Valuations are undemanding at 10x FY13F PE vs its 3-year net profit CAGR of 25% 
        b.        Our target price is S$2.38, based on 14x average FY12/13F PE, implying 0.5x PEG (FY12-14) 
        c.        The decline in OLAM SP's ROE from 21.4% in 2011 to 12.8% in 2012 was primarily due to capital raising to fund its growth. The group has never suffered a                         decline in net profit in the last 10 years, growing net profit from S$25.0m in 2002 to S$429.8m in 2011. 
        d.        As an indication of the capital raised,  in 2009 Olam did a convertible bond issue (US$300m) and a strategic placement to Temasek 
        e.        In terms of guidance, the group targets a S$1.0bn net profit by 2016, with NO equity dilution between now till 2016 to achieve the goal. 
 

ALL THIS ARE STATED BY ANALYST BUT I"M NOT AN INVESTOR FOR OLAM AND HAVE NO CURRENT VIEWS ON IT