Olam International

[CityFarmer]

Muddy waters searches for wrong doings in corporate world.

Valuebuddies searches for under valued ideas usually backed by real assets or high operating cashflows backed by decent dividend yields.

Olam in this case just like other fallen darlings of yester-years such as Raffles Edu, Midas or even peer comparison Noble doesn't really fit valuebuddies primary investment objectives - either undervalued by real assets or generating positive free cashflows that translates into decent dividend yields.

Hence, buddies can form their own investment judgement and make wise choices.

Olam-Muddy case demonstrated the vulnerability introduced by high debt to a company

Just by a Muddy Waters's public statement, Olam share price fell 11% with high volume.

[hkl]

if you have subscribed to muddy waters research email notifications:

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To Olam CEO Sunny Verghese and the Board of Directors:

In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours - not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters's opinion that Olam is at risk of collapsing due multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a "fly-by-night company". It has further evidenced a bizarre fixation on baseball caps.

Olam's disproportionate reaction is extraordinary in our experience. 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. We also note Olam's attempts to impugn our credibility.

You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.

Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam's mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.

We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.

We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.

Warmest Regards,
Muddy Waters, LLC

[Some-one]

if you have subscribed to muddy waters research email notifications:

----------------------------------------------------------------------------------------------------------------------
To Olam CEO Sunny Verghese and the Board of Directors:

In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours - not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters's opinion that Olam is at risk of collapsing due multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a "fly-by-night company". It has further evidenced a bizarre fixation on baseball caps.

Olam's disproportionate reaction is extraordinary in our experience. 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. We also note Olam's attempts to impugn our credibility.

You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.

Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam's mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.

We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.

We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.

Warmest Regards,
Muddy Waters, LLC

OMG. This is getting interesting. Thank you for posting...

[mrEngineer]

Actually this topic has brought my attention on the need to feed the hungry investors with consistent operating cashflows every year and being strategic (and try not to destroy value in the long run). What is more important?

As investors, it is important for us to search for companies with positive cashflows every year so that we can reduce our risk. But our universe is so limited compared to the entire business world. We know that there are some businesses that refuses to get listed as the have 50%-200% ROI even (like drugs or non-captial intensive business with limited room to grow etc.). On the other side of the spectrum with Olam as example, despite their razor thin margins and ridiculous D/E ratios, can you imagine if Singapore do not have a frontrunner for our government to deal or be a counterparty in all the different trading activities with all the soft commodities merchants / countries around the world with strategic intent to secure food and resources for Singapore especially when overpopulation is an impending threat?

Seriously, if I were Olam I would not really bother about capital constraints as I will be bailed out if something really goes wrong (e.g. how DBS merged with POSB). Maybe at the expense of investors (especially minority investors) but this is the world we live in. Should investors blame the system if they did not do their homework properly?

Maybe Olam should not be listed in the first place.. But at the same time, as an investor, I really do hope that this issue may lead to a re-organization like SMRT for Olam with less leverage and more focused on operations and not so much on financial games. Perhaps then, it will be time to look at it again. hehe

Muddy Waters have just taken a home run on this issue. Made $ from the shorting, gained reputation by challenging a semi-GLC coy. No one has really looked at how much wealth, jobs, good intentions that they have destroyed.

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Sorry for the rant.. Was just pissed off because I see congruence sometimes where nice strategic intents are put off for the purpose of quick wins, short recent operating cashflows and lack of risk taking or entrepreneurship behaviour..

[freedom]

not defending Olam. but the business model of Olam dictates that having high leverage is necessary to have a meaningful return of capital because of its thin margin. Of course, the risk within the business model is inherently low enough to warrant that generally, otherwise, the higher risk will generate higher profit margin.

[yeokiwi]

Being strategic does not mean that the company must leverage to a dangerous level.
Besides that, this kind of company with GLC backing may overpay for businesses in order to increase its scale of operation and to show a good report card to strategic investors.

HP has just written down $8.8 billion for Autonomy Software. Even with hoard of auditors checking figures in the company and they still did not manage to uncover frauds before the purchase was completed.

How sure are the shareholders that Olam did not overpay for all the agriculture businesses that it acquired?
and how sure that the businesses were valued correctly?

Overpaid and overleverage when come together will be a double whammy if the company starts to show weakness in cashflow.

[mobo]

This Olam CEO is so uncool.

I remeber few years ago, Cambridge was like whacking AIMS until upside down and try and stir as much shareholder anger as possible. George Wang from AIMS was calm as cookie, refute allegations as they come along over the next few weeks, present his side of the story and explain their propostion and ultimately chaired and successfully passed the required resolutions in a stormy EGM. The merits of the deal is debatable even to this date, but one can't deny he steered through this PR mess with clockwork effectiveness.

Contrast that to Olam - Just a few remarks from a short seller (albeit a famous one) Olam went ballistic with all that melodrama about fly-by-night company, harming stakeholders, constant referencing to Muddy Waters as a short seller, share buybacks, shouting off the roof about not needing debt capital, conference calls and fueling speculation about Carlson Bock disguising himself to visit Olam office.

Really I don't know who is right or wrong at this stage, but the PR response by Olam is downright atrocious. There are far better ways to defend yourself and project an image of strength, but multiple flailings in an uncoordinated manner is not one of them.

[level13]

Olam is not in my research list. But however, i am keen to find out if there is any basis on what Block has said since the formal report is not out yet.

There are only 3 things i am focusing on:
- Cash flow
- Book value
- Debt level

Cash flow -
Olam's track record of cashflow from operations over the years is patchy at best. Since Y2008, there are only 2 cashflow positive years (Y2009 & Y2012).

Book value -
As of the latest financial report, net book value of olam is $3.5B.

Debt level -
As of the latest financial report, total long term interest bearing debt is $4.3B (i am assuming the current assets cancel out current liabilities).

When the 3 items come together, the conclusion i have is:
The debt level is definitely too high for comfort. Just on interest alone, olam need to pay $400M per year. This will not be a major problem if it has a business model with stable cahflow. However, this is not the case. I am sure without the debt market, they can still operate. But in order to sustain their business down the road, they will definitely need to borrow again. Over time, this looks like a ponzi scheme to me and hardly any room for error.

[dzwm87]

It is not a Ponzi scheme because there is really a legit business running there.

We need to be certain that Carson's short call on Olam & Sino Forest are two different matters. The latter was accused on fraud play while the former is being accused of being too aggressive - in terms of leverage and revenue recognition. So with that, what Olam is doing is perfectly legal. The high net gearing ratio is legal thought dangerously high. The recognition from biological asset is also so common among some of the commodity players.

IMO, there is a lack of a short catalyst for Olam. We are sitting in an environment where interest rates are so low I believe refinancing will not be too big of an issue for Olam. The game will be different if we are in the brink of a financial crisis outbreak like 08 and banks start to squeeze on their credit line.

On a value long perspective, it is obvious Olam is a no. On a short perspective, it's not that certain as well.

On ethics wise, I think Carson might have some issues of conflict in interest. He had spoken so much but we have yet to see the report. Don't forget, his biggest hit was only Sino Forest - a one-hit wonder?

[d.o.g.]

On ethics wise, I think Carson might have some issues of conflict in interest. He had spoken so much but we have yet to see the report.Don't forget, his biggest hit was only Sino Forest - a one-hit wonder?

Of course Carson Block has a conflict of interest - he's short! And Sunny Verghese has a conflict of interest too - he's long!

I have read all the reports put out by Muddy Waters on their website. My take is that you may not agree with their conclusions, but based on the data they reference, their reasoning is sound.

Sino-Forest was big enough that it would be the biggest hit for almost anyone. There were others too e.g. China Media Express which has been delisted. If you look at the share prices of those targeted by Muddy Waters, the effect is quite clear. Very few have recovered, which suggests that the targets have simply been unable to refute Muddy Waters' accusations.

If Muddy Waters' work was poor it would be trivial to let the facts speak for themselves, and the firms' share prices should recover promptly. This has not happened, except perhaps for New Oriental Education.

Olam is no stranger to controversy - this is not the first time Olam is throwing a fit over someone else's comments. Hardly becoming of a global company with $17b in annual revenues.

For those who are trying to understand the business, good luck. They actively trade financial derivatives, so keep in mind that even if the physical commodity trading is fine, one financial trader can blow up the firm all by himself (see: Nick Leeson, Jerome Kerviel, Kweku Aduboli, Yasuo Hamanaka etc). Trading limits can always be bypassed, and employers often bend the rules when a star employee is doing well. Then one day he doesn't do so well, he doubles down to earn back the money, and boom! Game over.

As usual, YMMV.