Singapore Commodity Company Tanks After Muddy Waters Announces Short

Nov. 20 (Bloomberg) — Olam International Ltd. slumped the most in six months in Singapore trading after short-seller Carson Block questioned the agricultural commodity trader’s accounting methods.

The share declined 7.5 per cent to S$1.61 at the close, the lowest since May 16, while its bonds also fell in Asian trade. Block said he is betting against the stock because Olam, which had a record level of shorts as of Nov. 15, is booking profits on transactions before it’s clear how the deals will work out and is “aggressive” in reporting biological gains.

Olam “strongly rejects the assertions made by Carson Block and or Muddy Waters,” it said in a statement. The company said earlier it wasn’t contacted before by Block nor his Muddy Waters LLC research firm, and may issue a further statement if Block publishes a report on Olam.

Block, a 36-year-old lawyer, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 per cent before eventually filing for bankruptcy protection in March.

“Olam has to come out to prove their case and allay the fears raised by Muddy Waters,” said Alan Richardson, a Singapore-based fund manager who helps oversee about $82 billion for Samsung Asset Management, which doesn’t own Olam shares. “We will need to see how both sides are able to articulate their arguments.”


Bonds Tumble

The company, whose second-biggest shareholder is Singapore’s state-investment company Temasek Holdings Pte according to data compiled by Bloomberg, is down 24 per cent this year in Singapore, compared with a 12 per cent gain in the benchmark Straits Times Index. The stock dropped 21 per cent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg.

Olam’s dollar-denominated bonds due 2017 plunged to a record and were trading at 91.5 cents on the dollar as of 3:54 p.m. in Singapore, according to BNP Paribas SA prices. The company’s net debt was $5.7 billion as of Sept. 30, according to data compiled by Bloomberg.

The supplier of 20 goods from cocoa to rubber said its financial statements have been audited by Ernst & Young LLP and are in compliance with the Companies Act and Singapore Financial Reporting Standards. The company “reserves the right to take strong and appropriate action with regard to any unsubstantiated or baseless assertions,” Olam said.


Ratings Change

“It is not our practice to comment on individual entities or reports by market participants,” Mohamed Nasser Ismail, head of issuer regulations at Singapore Exchange, said in an e-mailed statement.

CIMB Group Holdings Bhd. analyst Lee Wen Ching downgraded Olam from neutral to trading sell on expectations of “selling pressure once trading resumes as fear overrides the group’s long-term growth plans,” she said today in an e-mailed report.

Singapore-based Olam, which handles more than 90 per cent of world trade in peanuts and is one of the top six cotton traders, is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, Block told the Ira Sohn Investment Conference in London.


‘Leap of Faith’

Olam will fail and recoveries for investors will be “negligible,” Block said. “It’s a leap of faith to think the company is being honest with its valuation” gains, he said.

Biological assets consist of plantations, crops and livestock, according to Olam’s annual report.

“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,” UOB-Kay Hian Holdings Ltd. analyst Eugene Ng said in an e-mailed note. “The stock is likely to see near-term impact from this piece of news and could trade lower toward its net asset value of S$1.35 before more clarity emerges.”

Short interest as a percentage of Olam shares outstanding rose to a record 13.4 per cent on Nov. 15, according to data compiled by Markit and Bloomberg.


Short Position

Block profited from taking a short position in Hong Kong- and Missisauga, Ontario-based Sino-Forest by borrowing and selling the stock, then repaying the borrowed shares at a lower price. The timber company plunged in Toronto trading before being suspended in August last year after Muddy Waters accused it of fraud in a June 2011 report.

The Ontario Securities Commission accused several executives including the former CEO Allen Chan of involvement in a “complex fraudulent scheme” to inflate assets and revenue.

Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd., claiming the Chinese advertising company overstated its network.

Shanghai-based Focus Media’s American depositary receipts have gained 24 per cent in New York trading this year despite Block’s allegations. The company is now the subject of a $3.5 billion buyout offer by a group of private equity firms including Carlyle Group LP. The deal, if completed, would be China’s largest leveraged buyout.


Proven Correct

“As it pertains to Sino-Forest, he was able to unearth something others weren’t,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments Inc. in Toronto, who sold his Sino-Forest shares for a loss in June 2011, seven days after Muddy Waters published its report on the company. “He, ultimately, was proven correct. You have to at least listen.”

John Armitage, co-founder of Egerton Capital Ltd., is also shorting Olam, he said at the investment conference in London yesterday.

Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Today, Olam is the fifth-largest publicly traded global wholesaler of agricultural products ranked by revenue, after Bunge Ltd., Archer-Daniels-Midland Co., Noble Group Ltd. and Glencore International Plc., according to data compiled by Bloomberg.


Biological Assets

The company supplies food to 12,300 customers in 65 countries and employs more than 18,000 people, the website says.

Stephen Forshaw, a spokesman for Temasek, referred to the comments by Olam when contacted today for comment. Olam’s auditor Ernst & Young declined to comment due to client confidentiality, spokeswoman Donna Liew said by e-mail. The firm was also the auditor for Sino-Forest before resigning in April.

Olam’s first-quarter net income of S$43.2 million ($35.3 million) included a gain of S$10.1 million on account of “fair valuation of biological assets,” Olam said in a Nov. 14 statement. It said then that it started making such valuations on a quarterly basis in the third quarter of fiscal 2012 and “hence there was no operational gain/loss booked in the corresponding period” a year earlier.

The company had previously reported fair value changes of biological assets twice a year, Executive Director Shekhar Anantharaman said at a briefing last week in Singapore.

“It is no different from the treatment of the past in terms of how we look at bio gains,” he said.


Valuation Gains

Net gains on biological assets accounted for S$111 million or 30 per cent of fiscal 2012 earnings, UOB’s Ng said. Those gains are expected to fall to 9 per cent of group earnings by fiscal 2015, he said. Biological assets account for 6.6 per cent of Olam’s assets and about 20 per cent of shareholder equity, according to Ng.

“We value the company excluding the valuation gains, so I don’t think it’s that big of a concern to us,” Carey Wong, an analyst at OCBC Investment Research Pte. in Singapore, said by phone. CIMB’s Lee also says she excludes biological assets when she makes profit forecasts.

Overall, Olam said its quarterly profit rose 26 per cent, while sales gained 45 per cent to S$4.69 billion.

–With assistance from Sarah McDonald and Adam Haigh in Sydney, Yuriy Humber in Tokyo, Jesse Westbrook in 東京 and Shruti Date Singh in Chicago. Editors: Madelene Pearson, Indranil Ghosh


To contact the reporters on this story: Michelle Yun in Hong Kong at [email protected]; Jonathan Burgos in Singapore at [email protected]


To contact the editor responsible for this story: Andrew Hobbs at [email protected]

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