SINGAPORE - The Nigerian export subsidies that Olam enjoys came under the spotlight once again, almost two years after equity broker CLSA first published a report pointing out Olam's reliance on these. On Tuesday, Muddy Waters followed suit.
In February last year, CLSA analyst Swati Chopra had highlighted how dependent Olam's profits were on Nigerian export incentives - known as EEGs - which she said comprise 30-40 per cent of Olam's earnings.
"Over time, as these reduce, Olam's profitability will be impacted," Ms Chopra had written.
The Nigerian government first introduced the incentives in 1986 to encourage farmers to grow more crops for export.
Olam had responded by saying then that the export incentives do not flow down directly to its profits. "We have to pass on almost all of this to our suppliers thereby increasing our cost of procurement," it said in a statement.
"We believe that our margins will remain largely stable even if these export incentives are withdrawn or changed as procurement prices would locally adjust to reflect any change in incentives."
The Nigerian incentives came up to one per cent of its consolidated revenue at the most between its 2008 to 2010 financial years, it added.
Said Muddy Waters: "We question Olam's assertions, and think that Olam's profits could be heavily reliant on the EEGs."
"Olam wanted to obfuscate the issue by making the market believe that because the EEGs are an insignificant proportion of revenue, then their absence would have little effect on Olam's profitability.
"However, the effect of EEGs on the bottom line is very important because, like any trading company, Olam generates substantial amounts of revenue with very low margins. The most important figures for trading companies is the bottom line," it said.