Short-selling fund Muddy Waters kept its "strong sell"
rating on crop trading giant Olam International despite the cashews-to-wheat
group unveiling a review of strategy in which there would be "no sacred cows".
Muddy Waters – which claims that Olam risks insolvency
thanks to high debt exposure and aggressive accounting practices, allegations
the commodities house strongly denies – acknowledged the Singapore-based group's
second-quarter results revealed some steps in what it believes is the right
"One of the bright spots for Olam investors is that the
company appear to be trying to rein in its capex and acquisition spending," the
Olam, unveiling late on Thursday a rise of 5.9% to Sing$136.1m
in underlying earnings for the last three months of 2012, revealed it was "recalibrating
its strategy", a process which looks set to reduce its debt burden.
Sunny Verghese, the Olam chief executive, said that "definitely
slowing down capex is one of the options that we would actively consider" for
the strategy review, which would have "no sacred cows".
'Burden is not
However, Muddy Waters restated concerns over Olam's
borrowings, which rose by Sing$1.3bn to Sing$8.8bn over the last six months of
"Olam's main problems worsened" over the quarter, the
research firm said, terming some debt-to-earnings indicators "dangerously
"With Olam's bonds yielding approximately 7% to 8% (which we
feel is too low), Olam's interest burden is not sustainable," said Muddy
Waters, headed by Carson Block, which has attacked a string of other Asian
companies over accounting.
And the concerns found some echo at broker Maybank, which restated
a "sell" rating on Olam stock, with a target price of Sing$1.30, cautioning of "weakness"
in core profits which "continues to stem from the increasing debt and overhead
"We do not see reason to own the stock, given risk associated
with refinancing in the next 18 months," Maybank, which is also based in
However, rival broker OCBC took a more upbeat line on the data,
noting that Olam "typically sees the highest gearing" at the end of the
calendar year, and terming as "positive" the strategy review.
OCBC maintained a "hold" rating on Olam shares, but, saying
the group's profits had beaten its forecasts, raised its target price of the
stock to Sing$1.50 from Sing$1.44.
The shares closed in Singapore on Friday, the first trading
session after the results were released, up 2.1% at Sing$1.67.
The shares have now recovered 22% from a December low
reached in the wake of the allegations by Muddy Waters, which has had some
success in unearthing misaccounting at other companies, including Sino-Forest
Corp, typically Chinese based but listed on Western exchanges.
Mr Verghese also revealed that Olam, which has launched a
claim for damages against Muddy Waters and Mr Block, had met with mixed success
in pursuing its case.
"We successfully, after a long time, served notice on Muddy
Waters," Mr Verghese told inevstors
"We have still not succeeded in serving notice on Carson
Block. And he has eluded all our attempts to serve him. We still continue to
try to serve him."
He added that a preliminary report for Olam on assets
belonging to Muddy Waters and Mr Block showed that "neither Muddy Waters nor
Carson Block has any assets of any value in their names".