What’s New
Olam's management held an analyst/media conference call regarding the report on the group that Muddy Waters was supposed to released yesterday. Here are our key takeaways:
• Olam’s stock was halted yesterday morning prior to trading. The company was led to believe that an 80-page Muddy Waters report would be released pre-market yesterday and requested the halt in order to protect shareholders’ interests. As there was no report issued, this was lifted after 3:30pm to allow market participants to continue trading.
• Olam has noticed significant short positions in its stock over the past few months, and appears to be the "most shorted stock" in Singapore.
• Olam's investment relations team held an “investor” meeting on 1 Nov 12 with two hedge funds. According to the company, Carson Block attended that meeting, but introduced himself by another name and as an investor in the two hedge funds. Management believes there are parties acting in concert to profit from a decline in the company's share price. It reserves the right to take legal action should there be evidence of market manipulation. They also believe certain hedge funds have approached Olam's key investors to sell the stock. Management believes Block's comments were made to "create panic among shareholders".
On allegations of aggressive accounting/debt levels:
• Banks and creditors have not pulled any credit lines from the company.
• Accounting for net gains on fair value on biological assets is "not by choice", by based on financial reporting standards (IAS 41). Assumptions to value assets have been "very conservative". Gains are likely to reverse to losses as assets mature in later years. A US$1b earnings target for the group has taken into account these losses.
Stock Impact
• Some uncertainty in the near term. The stock is likely to trade sideways in the near term pending further clarification and the Muddy Waters report if it is eventually released. Based on queries by analysts during the conference call, we believe there could still be a lack of understanding about the company due to its complexity and diversified geographies/products, participation at various levels of the supply chain. This may hinder efforts to remove uncertainty that has been created over the stock.
• Uncertainty created, but clear conflict of interest. Block’s short positions (we assume he is short) also places him in a position where he could profit from a decline in Olam’s stock price. Investors should be aware of this conflict of interest. Separately, we note that Muddy Waters has had a mixed track record. While its call on Sino-Forest was correct, its recent calls on New Oriental Education & Technology Group and Focus Media have been less accurate so far.
• Potential for share/bond buybacks. Olam’s management is of the view that shares trade at a deep discount to intrinsic value and could be a better investment compared with other investment opportunities available to the group. The group did not buy back shares or bonds yesterday. Olam has S$4b of unutilised credit lines and is prepared to buy back stock. The share buyback mandate was renewed in late-October for a buyback of up to 10% of Olam's shares. We believe this could provide some downside support for the stock.
• Short interest may attract contrarian investors. Olam's request for a trading halt could have prevented a collapse of the stock earlier today and short positions may not have had the opportunity to be covered. Contrarian investors may be attracted to Olam's stock due to the stock’s high short interest. The stock could reverse its losses if these short positions are be covered. Short interest almost doubled to 62m from end- May earlier this year to mid-October, before declining slightly to 58m in late October.
Earnings Revision/Risk
• No changes to our earnings estimates. Key risks include counterparty defaults, unavailability of credit and lower commodity prices.
Valuation/Recommendation
• Maintain BUY on the stock pending further developments and news of the Muddy Waters issue. Our 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.
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