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28-03-2013, 08:41 AM
Olam's recovery - much still to be done
By R Sivanithy
The Business Times
Thursday, Mar 28, 2013
SINGAPORE - So Olam International's shares have recovered to the level they occupied just before they were hit by short-seller/financial research firm Muddy Waters (MW). This rebound made the headlines last week and probably comes as a great relief to the company's shareholders who have had to withstand a harrowing four months following release of highly critical "sell'' reports by MW, during which their shares dropped sharply.
However, apart from a feel-good factor afforded by the price recovery, it's important to ask if anything has really changed. Have all important questions and issues that surrounded the MW episode been satisfactorily resolved? Hardly. Olam's shares may have rebounded but so have many others during the liquidity-driven run of the past few months as central banks in Europe, the US, Switzerland and Japan flood markets with money to kickstart growth, so it would be premature to conclude that the worst is over. If anything, much hard work still lies ahead to convince the market of the all-clear ahead.
First though, credit where it's due. When MW first aired its views on Olam and declared that it has short-sold the stock a little under four months ago in late November 2012, Olam's management responded extremely swiftly to control the damage.
Meetings and business trips were cancelled and the highest priority was given to dealing with MW's allegations, and throughout the following weeks Olam held press conferences and repeatedly defended itself vigorously from MW's assertions - actions which would have found much favour among its shareholders who were all caught unprepared and were likely bewildered at how quickly the value of their holdings was being eroded.
Knowing that speed was of the essence, Olam's management responded appropriately and in so doing, managed to achieve a critical if small victory - it regained some of the market's trust that might have been shaken by MW's report. Adding to this trust was the quick entry of Temasek Holdings, whose formidable presence helped in no small measure to calm the market's nerves.
However, counting against Olam was the fact that although there was quick and plentiful disclosures, quality information was not really that forthcoming, at least not in some of the more important areas touched upon by MW.
The pledging of management's shares as collateral, for example, has been glossed over with the inadequate response that such arrangements are personal matters, while the question of how the company could have raised as much debt as it has from the investing public without a debt rating has also not been dealt with at all.
Also, even though MW did use pretty incendiary language to get its message across that Olam's financials were perhaps not as rock-solid as some may have thought - and this has prompted a libel suit by Olam - stripping away fiery language and other embellishments like comparisons with the infamous Enron, the core of MW's recommendation was a "sell'' because the company was over-leveraged, under-funded, suffered from weak cash flows, relied too much on Nigerian export credits and acquisitions to keep its business model going and recognised revenues using an accounting method for biological assets that is by no means a foolproof gauge of good financial health.
All of this was reinforced by the fact that once the dust had settled after the initial salvos had been fired during November and December, there were other brokers who developed "sell'' calls of their own - UBS Investment Research, for example, on Jan 9 lowered its Olam target from $2.95 to $1.33, citing limited earnings visibility, high operating leverage and exposure to events outside management's control that are accentuated by high financial leverage, wide geographic spread of operations, uncertainty over capital expenditures and high exposure to the industrial raw materials segment.
Notably, the broker placed an upside limit of $1.80 versus a downside value of as low as 18 cents, depending on cost of debt assumptions, the latter not as calamitous as MW's "nuisance value" but alarmingly bad nonetheless.
The bottom line is that MW's valuation was probably grossly exaggerated in order to maximise its profit but to some extent there was merit to its analysis and its participation in this affair has had its benefits. It has alerted investors to the difficulties in properly valuing a complex business like Olam's, to question assertions that everything is going well - which understandably is the declared position of most managements most of the time - and to encourage shareholders to try and peer beyond accounting numbers to the heart of a company's financials.
If MW has by now covered its short positions and banked its profits, then good luck to it. It performed massive legwork and took on disproportionately large risk when it went against the grain with its short view.
As for Olam, its shares may have rebounded satisfactorily for now, but it's only just the start - there's a lot of hard work still to be done before its rehabilitation can be said to be complete
http://news.asiaone.com/News/AsiaOne%2BN...11458.html
By R Sivanithy
The Business Times
Thursday, Mar 28, 2013
SINGAPORE - So Olam International's shares have recovered to the level they occupied just before they were hit by short-seller/financial research firm Muddy Waters (MW). This rebound made the headlines last week and probably comes as a great relief to the company's shareholders who have had to withstand a harrowing four months following release of highly critical "sell'' reports by MW, during which their shares dropped sharply.
However, apart from a feel-good factor afforded by the price recovery, it's important to ask if anything has really changed. Have all important questions and issues that surrounded the MW episode been satisfactorily resolved? Hardly. Olam's shares may have rebounded but so have many others during the liquidity-driven run of the past few months as central banks in Europe, the US, Switzerland and Japan flood markets with money to kickstart growth, so it would be premature to conclude that the worst is over. If anything, much hard work still lies ahead to convince the market of the all-clear ahead.
First though, credit where it's due. When MW first aired its views on Olam and declared that it has short-sold the stock a little under four months ago in late November 2012, Olam's management responded extremely swiftly to control the damage.
Meetings and business trips were cancelled and the highest priority was given to dealing with MW's allegations, and throughout the following weeks Olam held press conferences and repeatedly defended itself vigorously from MW's assertions - actions which would have found much favour among its shareholders who were all caught unprepared and were likely bewildered at how quickly the value of their holdings was being eroded.
Knowing that speed was of the essence, Olam's management responded appropriately and in so doing, managed to achieve a critical if small victory - it regained some of the market's trust that might have been shaken by MW's report. Adding to this trust was the quick entry of Temasek Holdings, whose formidable presence helped in no small measure to calm the market's nerves.
However, counting against Olam was the fact that although there was quick and plentiful disclosures, quality information was not really that forthcoming, at least not in some of the more important areas touched upon by MW.
The pledging of management's shares as collateral, for example, has been glossed over with the inadequate response that such arrangements are personal matters, while the question of how the company could have raised as much debt as it has from the investing public without a debt rating has also not been dealt with at all.
Also, even though MW did use pretty incendiary language to get its message across that Olam's financials were perhaps not as rock-solid as some may have thought - and this has prompted a libel suit by Olam - stripping away fiery language and other embellishments like comparisons with the infamous Enron, the core of MW's recommendation was a "sell'' because the company was over-leveraged, under-funded, suffered from weak cash flows, relied too much on Nigerian export credits and acquisitions to keep its business model going and recognised revenues using an accounting method for biological assets that is by no means a foolproof gauge of good financial health.
All of this was reinforced by the fact that once the dust had settled after the initial salvos had been fired during November and December, there were other brokers who developed "sell'' calls of their own - UBS Investment Research, for example, on Jan 9 lowered its Olam target from $2.95 to $1.33, citing limited earnings visibility, high operating leverage and exposure to events outside management's control that are accentuated by high financial leverage, wide geographic spread of operations, uncertainty over capital expenditures and high exposure to the industrial raw materials segment.
Notably, the broker placed an upside limit of $1.80 versus a downside value of as low as 18 cents, depending on cost of debt assumptions, the latter not as calamitous as MW's "nuisance value" but alarmingly bad nonetheless.
The bottom line is that MW's valuation was probably grossly exaggerated in order to maximise its profit but to some extent there was merit to its analysis and its participation in this affair has had its benefits. It has alerted investors to the difficulties in properly valuing a complex business like Olam's, to question assertions that everything is going well - which understandably is the declared position of most managements most of the time - and to encourage shareholders to try and peer beyond accounting numbers to the heart of a company's financials.
If MW has by now covered its short positions and banked its profits, then good luck to it. It performed massive legwork and took on disproportionately large risk when it went against the grain with its short view.
As for Olam, its shares may have rebounded satisfactorily for now, but it's only just the start - there's a lot of hard work still to be done before its rehabilitation can be said to be complete
http://news.asiaone.com/News/AsiaOne%2BN...11458.html
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
