Olam International

[greengiraffe]

Giraffe has been in the stock market safari for moons. First time ever seeing elephants fighting so wittingly.

“Everyone is entitled to their own opinions, but they are not entitled to their own facts” - Senator Daniel Patrick Moynihan (1927-2003) - Olam's latest 45 page announcement opening statement.

All the words of wisdom and accounting theory has been out from both ends - Muddy and Olam. It really makes a good MBA project.

To me, it is a excellent case study. Bottomline - as investors we have a choice - vested or just watch the movie. The most important thing in investment is not about winning all or most of the time. But really is do we understand the business of the company we are vested in and the risks that we are undertaking. Once we master that - risks vs returns, then I think the investment will take care of itself.

Risks vs Returns - I am pretty sure that everyone knows that it takes more than even a PHD to make good sustainable calls in the stock market. It comes with hard work, sleepless nights and experience. So really its about understanding what you are invested in. Once that is done, even if one should lose money (not due to company specific risks) but due to market risks, then one should be able to hold one's nerves and take advantage of crisis situations.

I own odd lots in Olam since it is listed. Every year when i received the annual report, there is a wealth of infomation. Unfortunately, I am dumb enough not to understand what they are reaching out to me. So I didn't add on to Olam.

With my scarce resources, I can only invest in companies that I understand. In the meantime, this is good drama to follow. Not to forget, Temasek is still a substantial holder in Olam and Hyflux.

Green Giraffe

[l0nEr]

i fear the worse for Olam is yet to come. Muddy reputation vs. Olam business model. 133 page report is very telling indeed. we have a Co. that has been expending using recycled capital from fund raising. Need to check who the major financiers are and especially the equity side business is now damaged so its now standing on 1 leg - ie the business better generate cash enough to pay the bond holders and bank?

If that model is as what Muddy water points out to be flawed. We could well see a complete bail out from bankers and that's serious damage to commodities business.

We know the rice and sugar is kaput and not sure about nuts? I think Muddy got the right target hit in a very uncertain business environment.

trade 3 rounds of olam and only make a small bit but the rest all lost money. Looking at the sell vol. not sure who would win at the end of the day.

Muddy should perhaps do 1 on Genting also

My 2 cents worth... (just typing it out so that i can think through myself too)

yeah, but if you read the 45 page rebuttal from Olam, they also addressed quite a bit of stuff from Muddy Waters (certainly not all though). Most of what Muddy Waters wrote in their report isnt new, except for all the M&A progress and related accounting. All the non-cash accounting is a debate for the International Accounting Standards Committee (over the IFRS and SFRS), but what i understand is most analysts adjusts for the non-cash items. (According to bloomberg, 7 out of 10 does that, i wonder which are the 3 who didnt).
After reading a particular brokerage report and Olam's rebuttal, i dont particularly feel that Muddy Waters have done their full homework. I'm sure they did a lot of work (to be able to write such a long report), but it seems like didn't get the M&A acquisition cost differences totally correct.

From Muddy Waters: We believe that Olam’s fatal flaw, and one of its best kept secrets, is that its CapEx projects seem to be a fiscal black hole.

However, even the broker (3rd party without insider information) was able to point out that some of the differences came from non-cash acquisitions and that some of the acquisitions were not completed at the point of time (hence no cash capital expenditure). And that point was also printed in Olam's annual report. Yes they dig for 3 months to learn so much about the company, but turns out that one of the key argument is looking like a miscalculation. If Olam really does manage to reconcile the entire capex for Muddy Waters, i really dont see how much i can rely on Muddy Waters.

The various "failed" acquisitions are one point to note. While Olam has released figures (such as how many livestock they have) and internal presentations on the project updates, this is one thing nobody can ever be sure of. Since ultimately you arent there to count the livestock or see the rice being grown (anybody tried google maps or some live satellite view???). Sometimes its like the blind touching the elephant, everybody sees things from a different point of view. E.g. Muddy Waters saw one side of the field is flooded and took a flooded photo; Olam took only one photo with a rice field. And the key point is nobody can even tell whether the field is in Nigeria or just in Malaysia. Business and investments is done by trust, and Muddy Waters is really pointing at integrity. Without the trust, Olam will probably be going to trade like an S-chip.

Both sides are biased, one is long and the other is short. Up to you to listen. Muddy Waters is just creating a lot of impact now by pushing for valuation by liquidation (Making noise that the company is worthless attracts attention and creates more fear). I mean seriously, if you value a living business this way, no matter what you wont get a nice number, especially if the company is trading above book value. Most businesses are worth more as a whole then by parts (this is NOT F&N).
I think there is probably going to be a rebuttal from Muddy Waters. Took them 1 week to come up with follow ups to Focus Media, although they failed to follow up on New Oriental Education & Technology Group. But, it doesn't seem like Sunny is going to take it lying down.


And yes, i think this makes an excellent case study for both Business and accounting (Forensic accounting in particular....). I'm more interested in this from a more academic point of view then investment. Yes, risk is indeed high.

[AlphaQuant]

LTCM, Lehmans, Greece (who's next?) taught me one thing.

over leverage makes u vulnerable - even with a good strategy (how many people are brainier than John Meriwether, Robert Merton and Myron Scholes?). When dirt hits the fan, all correlations converge to 1 and all the bankers smell blood like sharks, the game is over.

i apply this not just to my trading, but also to my personal life. in fact i always think that these cases should be wrapped up into a module and introduced in tertiary institutions so young people understand these stuff before they start doing something stupid too early ,and realise the mistake too late.

[Boon]

Examining Muddy Waters’ Track Record

http://blogs.wsj.com/deals/2012/11/28/ex...ck-record/

[arthur]

To share with all.
CIMB report on Muddy Waters allegation.

Muddy Waters' allegations against Olam not totally unjustified: CIMB

But here's few reasons to believe Olam will ride out the storm.

"Muddy Waters’ allegations against Olam are not altogether unjustified, but they are not new. Although there could be a short-term stock overhang pending the release of the former’s research report, we believe this could present bargain-hunting opportunities," said CIMB analyst Lee Wen Ching.

Here's more from Lee:

Muddy Waters’ allegations against Olam have raised questions about the validity of the latter’s business model. We have examined these allegations and found them not totally unjustified, though not new to the market either. High gearing is common among supply chain managers. But we exclude readily marketable inventories (cash-like in nature) to determine its adjusted net gearing. Criticism over the recognition of biological-asset gains is nothing new. Such gains are valued by independent industry experts and are in line with Singapore’s FRS reporting standards. On our part, we strip out such gains in determining core net profits.

We believe Olam will be able to ride out the storm. Muddy Waters’ track record is spotted with hits and misses. History suggests that bargain-hunting
opportunities exist when stocks plunge on the day Muddy Waters releases its reports. While we do not advocate building positions pending the release of its report on Olam, should Olam plunge when the report is published, we believe there could be bottom-fishing opportunities.

Our Trading Sell is premised on near-term uncertainties until this saga blows over. Further downside is possible if Muddy Waters’ upcoming report throws up new issues. We keep our EPS and target price for now, still based on 1x CY13 NAV. Olam is not an outright Underperform as we believe share price weakness is driven by a one-off event and temporary in nature.



  Olam23112012cimb.pdf (Size: 522.35 KB / Downloads: 5)

[Some-one]

Examining Muddy Waters’ Track Record

http://blogs.wsj.com/deals/2012/11/28/ex...ck-record/

Thanks for the link. I was thinking why some people says Muddy Water record is patchy. From what I read, those for which Muddy Water release a detailed report, the company is either delisted or taken private. Those for which does not release detailed report, the stock price would move back. In Olam's case, they are releasing a very detailed report. Furthermore, most of the targets that Muddy Water hit, its share price did not recover fully. What would happen to the share price of Olam?

[mrEngineer]

Reading just 30+ pages of Muddy Waters Report, my preliminary thought was Olam is just suay (bad luck) especially for the NCAG recognition for the past 3 years. If Muddy Waters did not investigate and Olam management actually decides to set things right (assuming they have integrity and not dishonest in the long run), the price increase and supply constraints due to worldwide overpopulation by 2020 would have averted this crisis for them.

Imagine you are Olam Management Team, faced with such liquidity markets for the past 3 years (where plenty of funds flowed in emerging markets), and with an over-zealous ambition to expand, what would you do? You know clearly that the banks will lend only if your earnings / EBITDA are high, so you will try your best to inflate it as much as possible. After inflating, you realize that it will really take time for greenfield projects to see some progress, then you have to continue the inflating game.. This is just my guess.

Honestly, I was quite put off when I knew that the report was 133 pages but I spent 45 mins reading 30 page as the font size is huge (maybe 16).. So its quite manageable actually.. (ok for the fun of it, i copied into Word and did a word count -> 31k words which is equivalent to 3 MBA thesis paper. Imagine 3 MBA papers and you can bring down a billion dollar company. hehe)

[Some-one]

I only read 16 pages. No time to read the other pages. I think I need to find some time to read . Even if you are not vested, it is something that is good to learn for value investors.

[arthur]

(ok for the fun of it, i copied into Word and did a word count -> 31k words which is equivalent to 3 MBA thesis paper. Imagine 3 MBA papers and you can bring down a billion dollar company. hehe)

Trust you to even think of it!
But cool way of thinking though.

[mobo]

The one thing this whole drama thought me is that many of the so call fundamental analyst know much less than they think they know.

Forget about who is actually more correct, just read through the wealth of information from Muddy & Olam. How many of the so call Olam experts/analyst actually thought of 1/4 of the stuff that is mentioned in both reports before that?

I use to think all this analyst know a lot with their fancy PDF and nicely done reports. Then I got to know 2 ex-analyst (1 from a foreign bank, the other a local brokerage) now working in my company. Being interested in investing, I tried to pick their brains and realise they don't know much at all. From what I gather their jobs seem to be attending IR roadshows, result concalls, organized site visits and plucking in numbers to some standard template in their company and out pops a report.

I venture to say that a lot of brothers here know more than them and I learn much more here than from those 2 and the various reports my broker send me. These guys talk a good show with polished language and finance jargon, but strip that out the understanding of business dynamics is mushy at best.