Here are 2 analysts' take this morning on Olam International following Muddy Waters' 'strong sell' report on Olam.
UOB Kay Hian analyst: Eugene Ng
Olam insolvent? We believe the report premised on Olam's insolvency, which in our opinion is unlikely unless there is outright fraud. A warning is issued on Olam's requirement to raise or refinance up to S$4.6b over the next 12 months to stay solvent. However, we note that this number quite likely includes short-term revolving facilities of S$3.7b and S$1b for trade financing and capex respectively.
Interestingly, this number would have been higher as at end-FY11 at over $5b on the same measure and on a much smaller equity base. The question is whether such a measure is valid in the first place. In addition, certain issues such as accounting re-statements which have previously been brought up by others have already been addressed by the company.
In our view, investors should value Olam as a going concern. There are issues highlighted regarding overpayment and misleading investors, which Olam should address in its response to the report. However, these issues alone are not likely to cause Olam face solvency issues.
> Bond buyback an option. We highlighted previously that Olam could consider buying back stock. However, we note that this could weaken its equity position. Alternatively, if yields on Olam’s debt rise, the group has the option to purchase and extinguish long-term, higher-interest debt using short-term financing before seeking refinancing when things stabilise. This will allow it to book exceptional gains similar to those during the financial crisis.
> Olam refutes allegations. Following the report, Olam has issued a statement that its accounting practices are fully compliant with international accounting standards, and are drawn up in accordance with the provisions of the Companies Act and Singapore Financial Reporting Standards. It will provide a fuller response in due course. Olam also intends to "hold Muddy Waters accountable for their damaging actions".
> Range-bound trading likely to persist. The stock is likely to face volatile trading in the near term, and we expect range-bound trade until these issues are addressed comprehensively. However, we note that due to the complexities of the business, it could be a protracted process.
No changes to our earnings estimate. Key risks include counterparty defaults, unavailability of credit and lower commodity prices.
We await further developments and detailed updates from management before reviewing our estimates or recommendation. Our BUY recommendation and target price of S$2.38 remains unchanged and pegged to 13.5x average FY13F/FY14F PE (core earnings). Valuations on a P/B basis remain attractive at close to -2SD levels and below global financial crisis lows.
Share Price Catalyst
Short covering. Sustained earnings recovery into 2HFY13.
CIMB analyst: Lee Wen Ching
Olam has refuted the report, saying its broad allegations lack substance. Management will provide a fuller response in due course.
Until then, we make no changes to our Trading Sell (near-term event trigger), EPS and target price, based on 1x CY13 NAV, where we expect the stock to find mid-term support.
We think this report exaggerates the negatives, most of which are already known by the market, rather than bringing up new concerns. Muddy Waters appears to have built its investment thesis around biological-asset gains and negative goodwill, which we deem secondary as we strip them out in deriving core net profits.
Borrowings are high, yes, but most are backed by readily marketable inventories, which are
cash-like in nature. Heavy capex is not a new concern, either, and has been well-communicated by management. Olam may be a black box but this is a common characteristic of supply chain
What You Should Do
Olam is on trading halt, presumably pending clarification of the above. The stock slipped 6% yesterday on Muddy Waters’ report and has fallen below our target price. Should its weakness persist, we would expect the next level of support at its Sep 12 book value of S$1.35.