The key difference between Muddy Waters short-seller Carson Block's reported comments on Olam (O32.SG) and Sino-Forest (SNOFF) is that it believes Olam's accounting is aggressive, not fraudulent, UOB KayHian says in a note to clients. (Olam's shares are halted. Bloomberg reported Block said Olam is "heavily" indebted and aggressive in reporting biological gains;
"It's a leap of faith to think the company is being honest with its valuation" gains, he said at the Ira Sohn Investment Conference in London according to the report, adding he expects Olam to fail with negligible recoveries for investors. Olam said it is "dismayed at the nature and lack of substance of these assertions and opinions about Olam's financial position.") "While the accusations are serious, we believe Block's argument is inconsistent as the group will not fail even if the entire value of its biological assets is written off," the house says.
UOB-KH notes fiscal-FY12 net gains on biological assets accounted for S$111 million, or 30% of FY12 earnings; the house estimates Olam's FY13-15 biological-asset fair value net gains at S$101 million, S$93 million and S$61 million respectively, accounting for 24%, 17% and 9% of earnings. It notes Olam has said for two years the biological-asset gains are on production-capacity increase, not commodity-price assumptions;
Olam has guided for the gains to decline as its almond orchards mature. "The stock is likely to see near term impact from this piece of news and could trade lower towards its net asset value of S$1.35 before more clarity emerges. However, we note that the group's balance sheet is well-positioned for share buybacks and is likely to re-commence the program should its stock price fall sufficiently." Olam is halted; it last changed hands at S$1.74.
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