Muddy Waters report gives the Olam pot another stir

SINGAPORE - Muddy Waters finally put its mouth where its money was on Tuesday with a 133-page report on Olam detailing what it claims are the commodity trader's shortcomings, and recommending a "strong sell".

The report comes a week after the man behind Muddy Waters - US short-seller Carson Block - told the market that he had shorted Olam stock and called the firm's accounting practices into question.

Thinking that Muddy Waters would be releasing its report on Tuesday morning, Olam was forced to halt trading of the stock. When it resumed trading later in the day, its share price tumbled by as much at 11 per cent.

After an "initial read" of the report, Olam said Tuesday evening that they "remain clear that there is no substance in their broad allegations. We continue to study the report in greater detail and will provide a fuller response in due course."

Olam added: "We will clear our name and hold Muddy Waters accountable for their damaging actions."

Even in the face of a lawsuit that Olam launched against Muddy Waters and Mr Block last week, the US research firm doubled down on Tuesday, calling Olam's response "stunningly defensive" and insisting that, "in no way are we intimidated by Olam",

The upshot of the report valued Olam on a "liquidation basis" and estimated the present value of unsecured bonds at "14 to 33 cents on the dollar".

As the market digested Muddy Waters' report on Tuesday, analysts held out on jumping to conclusions.

"We know the intention and we're hearing one side of the story. We should hear both sides of the story and let Olam respond to the report," said UOB-KayHian analyst Eugene Ng.

Olam's shares on Tuesday plunged in the late afternoon as news of Muddy Waters' report broke, ending 10 cents lower at $1.56. It has tumbled 10.3 per cent since Muddy Waters launched its criticism of the firm.

Last week, Olam's chief executive Sunny Verghese called Mr Block's claims "baseless". "We feel that this has been a very concerted and unfair attack on the company and we intend to defend ourselves vigorously," Mr Verghese had said.

The Muddy Waters report focused on four areas - Olam's "non-cash accounting gains", the issue of its solvency, the sustainability of its business model and its "off the rails" capital expenditure.

The research firm took especial issue with the accounting gains, which it said were made up mostly of negative goodwill and biological gains.

"Non-cash accounting gains equate to 37.9 per cent of (profit after tax) from FY2010 through FY2012," the report said.

On the solvency front, it alleged that Olam only had about S$60 million of "truly free cash" as at the firm's FY2012.

The report also elaborated on Mr Block's "black hole" claim from last week, saying that Olam's capital expenditure projects appeared to be a "fiscal black hole". This "black hole" concept was extrapolated to include third-party knowledge about Olam.

"Analysts have no idea how to forecast Olam's capex, and all seem to have greatly underestimated FY2013 levels based on Q1," Muddy Waters claimed.

"Analysts' annual revenue and earnings estimate ranges are substantial, and indicate that analysts do not know how to model the company. Despite already being in Q2 2013, the 19 estimates for FY2013 revenue range from S$18.2 billion to S$23.3 billion."

Olam's business model was also deemed "dependent on export incentives" from governments such as Nigeria and Gabon, which represented revenue streams that are not sustainable, the report surmised. It also took a dim view of Olam's industry as a whole, noting that commodity prices have stayed high but margins are now thinner.

The research firm also drew parallels between Olam and bankrupted energy giant Enron, while acknowledging that such comparisons are "overused".

"But in the case of Olam, the similarities really are uncanny. We believe that the single biggest factor in Enron's collapse was its use of accounting techniques similar to Olam's value gains. Both companies married problematic trading businesses with asset heavy businesses," the report said.

Leading up to the report, Muddy Waters claimed that it spent about three months researching Olam on a full-time basis.

While it is not clear who else apart from Mr Block is part of Muddy Waters, the report refers to a team of "experts in forensic accounting, law, investigations, production, international trade, and finance", in addition to investigators hired to research Olam across four continents.

Olam, in previous responses, had accused Mr Block of pretending to be someone else in a cloak-and-dagger visit he made to Olam's office on Nov 1.

On Tuesday, an analyst who declined to be named said: "A lot of (the report) is very project-specific. It seems like a collection of projects, and there's a fair bit of old stuff that's been brought in again. "What this report is trying to do is to scare the bankers. Like any other company, if the bankers do not trust the company, and do not extend more lines, then of course the company is going to get into trouble."

Olam is not the first company to find its share price dancing a frenzied jig to Muddy Waters' tune. Over the past 12 months, the short-selling firm issued "strong sell" calls on Focus Media Holding and New Oriental Education & Technology Group, while alleging that Nasdaq-listed Fushi Copperweld Inc is at a "high risk of fraud".

While Focus Media Holding's share price tanked 30 per cent in the wake of Muddy Waters' "strong sell" call a year ago, it has since recovered recovered to pre-crisis prices.

New Oriental Education, however, relatively fresh from its July tangle with Muddy Waters, has recovered somewhat from its 58 per cent share price plunge, but last traded at a 14 per cent discount to its price from before the "sell" call.