Bloomberg News

Olam Declines After Muddy Waters Questions Accounts

November 20, 2012

Muddy Waters Founder Carson Block

Carson Block, research director and founder of Muddy Waters LLC. Photographer: David Paul Morris/Bloomberg

Olam International Ltd. (OLAM) slumped the most in six months in Singapore trading after short-seller Carson Block questioned the agricultural commodity trader’s accounting methods.

The shares fell 7.5 percent to S$1.61 at the close, the lowest since May 16. The bonds dropped in Asian trade. Block said he is betting against the stock because Olam, which had a record level of shorts as of Nov. 15, is booking profits on transactions before it’s clear how the deals will work out. The company is “aggressive” in reporting gains on its biological assets, including plantations, crop, and cattle.

“We consider these statements as having no merit and being fairly baseless assertions,” Chief Executive Officer Sunny Verghese said today on a conference call. “There was a deliberate attempt to create panic among our shareholders.”

Block, a 36-year-old lawyer who founded investment firm Muddy Waters LLC, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March.

“We will need to see how both sides are able to articulate their arguments,” said Alan Richardson, a Singapore-based fund manager who helps oversee about $82 billion for Samsung Asset Management, which doesn’t own Olam shares.

Olam will wait for Block to publish his report and answer any queries about it, Verghese said.

Bonds Tumble

The company, whose second-biggest shareholder is Singapore’s state-investment company Temasek Holdings Pte according to data compiled by Bloomberg, is down 24 percent this year in Singapore, compared with a 12 percent gain in the benchmark Straits Times Index. The stock dropped 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg.

Olam’s dollar-denominated bonds due 2017 plunged to a record and were at 91.5 cents on the dollar at 3:54 p.m. in Singapore, according to BNP Paribas SA prices. The company’s net debt was $5.7 billion as of Sept. 30, according to data compiled by Bloomberg.

The company may consider buying back shares and intervene in the bond market if necessary, Verghese said on the call, adding he has never traded a single of his Olam shares.

The supplier of 20 goods from cocoa to rubber said its financial statements have been audited by Ernst & Young LLP and are in compliance with the Companies Act and Singapore Financial Reporting Standards. The company “reserves the right to take strong and appropriate action with regard to any unsubstantiated or baseless assertions,” Olam said.

Peanuts, Cotton

CIMB Group Holdings Bhd. analyst Lee Wen Ching downgraded Olam from neutral to trading sell on expectations of “selling pressure once trading resumes as fear overrides the group’s long-term growth plans,” she said today in an e-mailed report.

Singapore-based Olam, which handles more than 90 percent of world trade in peanuts and is one of the top six cotton traders, is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, Block told the Ira Sohn Investment Conference in London.

Block “is not acting alone” and the company believes he visited Olam’s Singapore office on Nov. 1 in disguise, Verghese said.

‘Leap of Faith’

Olam will fail and recoveries for investors will be “negligible,” Block said. “It’s a leap of faith to think the company is being honest with its valuation” gains, he said.

“While the accusations are serious, we believe Block’s argument is inconsistent as the group will not fail even if the entire value of its biological assets is written off,” UOB-Kay Hian Holdings Ltd. analyst Eugene Ng said in an e-mailed note. “The stock is likely to see near-term impact from this piece of news and could trade lower toward its net asset value of S$1.35 before more clarity emerges.”

Short interest as a percentage of Olam shares outstanding rose to a record 13.4 percent on Nov. 15, according to data compiled by Markit and Bloomberg.

Block profited from taking a short position in Hong Kong- and Missisauga, Ontario-based Sino-Forest by borrowing and selling the stock, then repaying the borrowed shares at a lower price. The timber company plunged in Toronto trading before being suspended in August last year after Muddy Waters accused it of fraud in a June 2011 report.

The Ontario Securities Commission accused several executives including the former CEO Allen Chan of involvement in a “complex fraudulent scheme” to inflate assets and revenue.

Muddy Waters Targets

Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd. (FMCN:US), claiming the Chinese advertising company overstated its network.

Shanghai-based Focus Media’s American depositary receipts (FMCN:US) have gained 24 percent in New York trading this year, notwithstanding Block’s allegations. The company is now the subject of a $3.5 billion buyout offer by a group of private equity firms including Carlyle Group LP. The deal, if completed, would be China’s largest leveraged buyout.

“As it pertains to Sino-Forest, he was able to unearth something others weren’t,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments Inc. in Toronto, who sold his Sino-Forest shares for a loss in June 2011, seven days after Muddy Waters published its report on the company. “He, ultimately, was proven correct. You have to at least listen.”

Nigerian Origin

John Armitage, co-founder of Egerton Capital Ltd., is also shorting Olam, he said at the investment conference in London yesterday.

Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Today, Olam is the fifth-largest publicly traded global wholesaler of agricultural products ranked by revenue, after Bunge Ltd., Archer-Daniels-Midland Co., Noble Group Ltd. and Glencore International Plc., according to data compiled by Bloomberg.

The company supplies food to 12,300 customers in 65 countries and employs more than 18,000 people, the website says.

Stephen Forshaw, a spokesman for Temasek, referred to the comments by Olam when contacted today for comment. Olam’s auditor Ernst & Young declined to comment due to client confidentiality, spokeswoman Donna Liew said by e-mail. The firm was also the auditor for Sino-Forest before resigning in April. The Singapore Exchange also declined to comment.

Biological Assets

The first-quarter net income of S$43.2 million ($35.3 million) included a gain of S$10.1 million on account of “fair valuation of biological assets,” Olam said in a Nov. 14 statement. It said then that it started making such valuations on a quarterly basis in the third quarter of fiscal 2012 and “hence there was no operational gain/loss booked in the corresponding period” a year earlier.

The company had previously reported fair value changes of biological assets twice a year, Executive Director Shekhar Anantharaman said at a briefing last week in Singapore.

“It is no different from the treatment of the past in terms of how we look at bio gains,” he said.

Valuation Gains

Net gains on biological assets accounted for S$111 million, or 30 percent of fiscal 2012 earnings, UOB’s Ng said. Those gains are expected to fall to 9 percent of group earnings by fiscal 2015, he said. Biological assets account for 6.6 percent of Olam’s assets and about 20 percent of shareholder equity, according to Ng.

“We value the company excluding the valuation gains, so I don’t think it’s that big of a concern to us,” Carey Wong, an analyst at OCBC Investment Research Pte. in Singapore, said by phone. CIMB’s Lee also says she excludes biological assets when she makes profit forecasts.

Overall, Olam said its quarterly profit rose 26 percent, while sales gained 45 percent to S$4.69 billion.

To contact the reporters on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net; Jonathan Burgos in Singapore at jburgos4@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net


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