Olam International

[Stocker]

Many 'S' chips chose to list on SGX because they were not qualified to list on HKSE. Just look at the performance of the 's' chips .

[shanrui_91]

The problem with biological gain is that one is simply booking future profit in advance and that this future profit might not happen. In such a case, why not simply book the profit after the sales of goods which should have been a better accounting standards? Biological gain allows companies to play around with their profits and I am sure Oceanus has proven the case. The benefit of biological gain is perhaps that shareholders are able to "see the actual value" of the biological asset as it grows just like in the case of the properties in REITs which have to undergo revaluation annually. However, biological asset is certainly much riskier and easier to play around as compared to property.

Having read through the full report by Muddy Water and the rebuttal by Olam, I feel that there are definitely a few lessons that we can learn from the Muddy Water report:

1) one of the major contention of MW is more of the negative goodwill rather than the biological gain. Negative goodwill arose in numerous circumstances as somehow Olam is able to purchase companies "cheaply" and hence book negative goodwil when it revalue their asset to be much more than it has paid. Some of the acquisition like the Crown Flour Mill and Sk Food are also a bit shady given their past track records. IN its defense of goodwill , Olam simply uses FRS and the auditors as its shield. It is certainly rare to have the opportunity to make numerous acquisition with negative goodwill booked, implying that the initial owners failed in their valuation of asset.

2) MW has rightly pointed out the 3 levels of derivatives reporting in p.g. 30 of its report which Olam has definitely not been able to counter effectively. Over the years, the amount of level 3 derivatives have grown significantly as the management has decided to shift a huge portion of its level 2 derivatives to level 3. The problem with level 3 is that the valuation is based on inputs by the management rather than being based on quoted prices in the market. What this means is that lots of assumptions have been built in as anyone else that has built a DCF mdoel will have understood. Moreover, commodities are volatile which makes any prediction inaccurate. It was stunning that the potential effect of adjusting the assumption by +/- 1% will have resulted in a change of profit of $12 million on the fair value of the derivatives. With regard to this point, Olam points out that this model is frequently used by the industry. The 3 level of derivatives are certainly worth learning.

3) irregularities have been frequently found in Olam's financial statement especially from Q4 report to the actual report in the annual report. often, there are huge variations in the various inputs like PPE, cash, interest income and expense between the Q4 results and the final results in the annual report, but the bottom line be it the profit, equity or cash remains unchanged. In Q4 2011, they found that Olam reported 0 interest income despite an average cash balance of $818.8 million. This seemed like a good way to sense how real the huge cash balance of the S-chips here is. Of course, it can possibly imply the high working capital requirement of the company though it seemed unrealistic to have 0 interest income

With regards to various other claims made by MW that are not as well-supported or lacking in actual fact, Olam is able to provide a satisfactory answer. However, when it comes down to the cold hard facts and especially the fillings made by Olam, MW has certainly proven its points.

[l0nEr]

The problem with biological gain is that one is simply booking future profit in advance and that this future profit might not happen. In such a case, why not simply book the profit after the sales of goods which should have been a better accounting standards? Biological gain allows companies to play around with their profits and I am sure Oceanus has proven the case. The benefit of biological gain is perhaps that shareholders are able to "see the actual value" of the biological asset as it grows just like in the case of the properties in REITs which have to undergo revaluation annually. However, biological asset is certainly much riskier and easier to play around as compared to property.

Yep... REIT property valuation is done by an independent party. If i am not wrong, they also relies on Models (level 3 fair value) or recently transacted prices/per sq ft prices (level 2 fair value) to determine the fair value of the properties. This is because there is usually no way to obtain a level 1 fair value estimate of the property since there is no active market
Refer to FRS 113.
Not exactly sure if is done this way in real life though... think they just dont disclose that they are most probably relying on level 2 fair value estimates generated by the independent valuer.

1) one of the major contention of MW is more of the negative goodwill rather than the biological gain. Negative goodwill arose in numerous circumstances as somehow Olam is able to purchase companies "cheaply" and hence book negative goodwil when it revalue their asset to be much more than it has paid. Some of the acquisition like the Crown Flour Mill and Sk Food are also a bit shady given their past track records. IN its defense of goodwill , Olam simply uses FRS and the auditors as its shield. It is certainly rare to have the opportunity to make numerous acquisition with negative goodwill booked, implying that the initial owners failed in their valuation of asset.

Not exactly. If you buy distressed assets or poorly managed stuff, you buy assets cheaply. There can be a lot of reasons why assets become distressed (i.e. management screwed up, overleverage, kena fraud, etc etc), but the value might be greater than that. Particularly, when the going concern assumption is no longer there, the assets cannot be valued at 'value-in-use', which tends to be of a higher value. (a PPE is probably worth more being used to generate income than to be sold to some other company). There are a lot of distressed debt funds, and PE funds that earn from such 'mispricing'. Its always cheaper and more advantageous when one party is 'forced' to sell I think Olam did say some of these assets are bought at distressed state.

2) MW has rightly pointed out the 3 levels of derivatives reporting in p.g. 30 of its report which Olam has definitely not been able to counter effectively. Over the years, the amount of level 3 derivatives have grown significantly as the management has decided to shift a huge portion of its level 2 derivatives to level 3. The problem with level 3 is that the valuation is based on inputs by the management rather than being based on quoted prices in the market. What this means is that lots of assumptions have been built in as anyone else that has built a DCF mdoel will have understood. Moreover, commodities are volatile which makes any prediction inaccurate. It was stunning that the potential effect of adjusting the assumption by +/- 1% will have resulted in a change of profit of $12 million on the fair value of the derivatives. With regard to this point, Olam points out that this model is frequently used by the industry. The 3 level of derivatives are certainly worth learning.

Yup. This is a question for the international accounting board to decide.
I think they were forced to use it mainly because of the cotton contracts, which was facing a lot of issues at that point of time.
The size of the fluctuation is because of the large amount of outstanding contracts.
So its up to you to decide if the assumptions are reasonable. Do you think they are??
Actually to me this is just an accounting issue. Even if they revalue the stock upwards, when they realise the sale, their COGS will also be higher (i.e. lower profits). An example is, if Olam keeps revaluing the cow higher as it grows (from initial cost of 500 to 2000), when Olam finally sells the cow at 5000, its cost will be higher at 2000, resulting in lower profits of 3000 at the point of sale. While analysts and people keep ignoring the non-cash revaluation gains of 1500, they also do not adjust/or take into account of the 1500 in the year of the sale (i.e. analysts will only see profits of 3000, and not 4500, so the 1500 is MIA).
The whole issue of placing a level 3 or 2 is just so that people have a value on the balance sheet on the respectively balance sheet date. Eventually, if the asset is being sold, it will eventually flow through to the P/L (its just a question of when). If the company is not under the obligation to release a balance sheet, but just the P&L statement, this issue would not even have surfaced, coz people will just continue to see the profits and cash flowing it thats all!

3) irregularities have been frequently found in Olam's financial statement especially from Q4 report to the actual report in the annual report. often, there are huge variations in the various inputs like PPE, cash, interest income and expense between the Q4 results and the final results in the annual report, but the bottom line be it the profit, equity or cash remains unchanged. In Q4 2011, they found that Olam reported 0 interest income despite an average cash balance of $818.8 million. This seemed like a good way to sense how real the huge cash balance of the S-chips here is. Of course, it can possibly imply the high working capital requirement of the company though it seemed unrealistic to have 0 interest income

This is indeed interesting...

[CityFarmer]

From Edge Singapore online

"... Olam will pay a 2 percent underwriting commission to banks managing the bond sale and the banks agreed to pay 0.85 percent of the principal amount of the bonds to a Temasek unit for sub- underwriting..."

Temasek enjoying 8% return from the right issue with 5 years right to purchase Olam share in future with a depressed price. On top of that, it still have a share of 0.85% of principal amount by "sub-underwriting".

If Olam survive and business model is sound. The biggest beneficial of the saga may be is Temasek, rather of MW

A story of "蚌鹤相争 渔翁得利“

http://www.theedgesingapore.com/the-dail...-plan.html

[cfa]

There must be a reason why HKSE don't accept such biz accounting model.

[Temperament]

"蚌鹤相争 渔翁得利“

Or can it be when elephants makes love or war, the surrounding grass suffers. Will we be all affected? i hope SGX will not suffer.
Cheers!

[CityFarmer]

"蚌鹤相争 渔翁得利“

Or can it be when elephants makes love or war, the surrounding grass suffers. Will we be all affected? i hope SGX will not suffer.
Cheers!

You mean “池鱼之殃”

SGX should not be impacted, but shortish following MW might hurt if not careful

[Temperament]

"蚌鹤相争 渔翁得利“

Or can it be when elephants makes love or war, the surrounding grass suffers. Will we be all affected? i hope SGX will not suffer.
Cheers!

You mean “池鱼之殃”

SGX should not be impacted, but shortish following MW might hurt if not careful

i mean supposing only:-
1) MW is proven to be right that Olam is like another "Enron"
2) So it follows HK EXC is right about Olam also.
3) Why then SGX allows Olam's way of accounting?
4)Then won't it affect SGX's reputation not to mention TooMuchSick?
5) if SGX's reputation is affected, will it affect us also since we invest in SGX?

[RBM]

Purely an FYI. Olam's S$ 7% p.a. Perpetual Bonds seem to have settled at the S$ 78'ish level - that has been the closing price for the last three (3) trading sessions. Trading volumes in the Perpetuals have apparently been minimal in the last couple of sessions.

S$ 78 corresponds to a yield of just under 9% p.a. While I'm currently vested, I have no intention of buying any more Olam Perpetuals - this yield is, in my personal view, too low to justify the "Olam risk" ...... and HOLD is the advice I am now getting from my Bank RM. I do understand that one Private Bank in Singapore is recommending to their clients investing in the non-perpetual Olam Bonds.

Vested (in the Perpetuals)

[arthur]

Just a general comments to all;

If I may just add on my 2 cents advise, I strongly would not recommend any private client to invest in any bonds of Olam if I am a banker myself.

In trading, many traders would look in the perspective of reward-risk ratio.
If the ratio is high, take the trade, if otherwise, hold for better opportunities. They will come.

In investment, nearly everyone here would know Buffet's Rule no. 1 and 2. They are exactly the same, just in different context.

The bankers owe nobody an obligation to refund any client any losses should their advises turn lemon.

If I may take a leaf off the Fixed Income critierias of our vaunted Security Analysis 2nd ed.

1. Safety is measured not by specific lien or other contractual rights, but by the ability of the issuer to meet all of its obligations.

2. This ability should be measured under conditions of depression rather than prosperity.

3. Deficient safety cannot be compensated for by an abnormally high coupon rate.

4. The selection of all bonds for investment should be subject to rules of exclusion and to specific quantitiative tests corresponding to those prescribed by statute to govern investments of savings banks.

While I am no bond expert, investing into Olam now is as good as punting.
To me, we choose a bond due to its safe nature and if there's a risk, however minimal, we should avoid at all cost.

I am aware there are bankers blowing promises of Temasek being the white knight to the rescue and Olam will not fail.
Investing should not be about hoping for some white knights arrival but about confidence in the issuer's stability without any external help.

If I may ask, who dare to say Olam would not have gone bust by now if Temasek haven't came in. The fact that Temasek did, and thus, the credibility of Olam has indeed become muddy.