Olam Plunges After Muddy Waters’ Block Questions Accounts

Olam Plunges After Muddy Waters’ Block Questions Accounts
Olam shares were suspended from trading in Singapore after short-seller Carson Block questioned the company's accounting methods. Source: Olam International Ltd. via Bloomberg

Olam International Ltd., the agricultural commodities trader part-owned by Singapore’s state investment company, plunged the most in four years in U.S. trading after short-seller Carson Block questioned the company’s accounting methods.

The supplier of 20 goods from cocoa to rubber halted its stock in Singapore today, after falling 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg. The company is booking profits on transactions before it’s clear how the deals will work out over time, Block said, who also said he’s betting against the stock.

Olam is “dismayed at the nature and lack of substance” of the comments and wasn’t contacted before by him or his Muddy Waters LLC research firm, Chief Executive Officer Sunny Verghese said in an e-mailed statement. He’s waiting for a report from Muddy Waters and “will strongly defend Olam’s excellent reputation for transparency and good governance,” he said.

Block, 36, 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 percent before eventually filing for bankruptcy protection in March last year.

‘Leap of Faith’

Singapore-based Olam, which handles more than 90 percent 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.

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.

The company, whose second-biggest shareholder is state-owned Temasek Holdings Pte according to data compiled by Bloomberg., dropped 0.9 percent in Singapore yesterday to S$1.74 before the 29 cent plunge to $1.10 in New York. It has fallen 18 percent in Singapore this year compared with a 12 percent gain in the benchmark Straits Times Index.

“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.”

Hong Kong- and Mississauga, Ontario-based Sino-Forest plunged before being suspended in August last year after a June 2011 report from Muddy Waters accused it of fraud.

Short Position

Block took a short position in Sino-Forest by borrowing and selling the stock, aiming to profit by repaying the borrowed shares at a lower price. Sino-Forest filed for bankruptcy protection in March. 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 percent 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 LLP declined to comment due to client confidentiality, spokeswoman Donna Liew said by e-mail. The firm was also the auditor for Sino-Forest Corp. 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.

Biological Assets

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.

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

Overall, Olam said its quarterly profit rose 26 percent while sales gained 45 percent to S$4.69 billion. Net debt was $5.7 billion as of Sept. 30, according to data compiled by Bloomberg.

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