Olam International Ltd., the commodity trader targeted by short-seller Carson Block, said it will cut spending and sell assets to boost cash while warning it will miss a $1 billion profit target set for 2016.
Capital spending will be slashed by around S$1 billion ($808 million), the Singapore-based company, the world’s second-largest rice trader, said yesterday in its annual business review. It will seek to raise approximately S$1.5 billion in cash by fiscal 2016 by selling assets and scaling down some operations.
The results of the review come five months after Block and his research firm Muddy Waters LLC first questioned the finances of Olam and likened it to failed energy traded Enron Corp. Olam Chief Executive Officer Sunny Verghese said the review had been broad and reflected stakeholder feedback.
“We have listened to our fiercest critics as well as our most ardent advocates,” Verghese told reporters yesterday in Singapore. “The process has been very thorough.”
Shares of Olam slid 0.3 percent to close at S$1.665 in Singapore, compared with a 0.3 percent gain in the benchmark Straits Times index. The stock slumped to as low as S$1.395 following Block’s assertions. It closed at S$1.74 on Nov. 19, before Block’s first comments.
“While initiatives to improve balance sheet strength and cash flow will be looked upon favorably, this will be weighed against a slower profit growth trajectory,” James Koh, an analyst with Maybank Kim Eng Holdings Ltd. in Singapore, said in a report today.
The company in 2011 revised its target for profit after tax to $1 billion by 2016, up from a goal of $454 million by 2015 set two years earlier. Net income was S$370.9 million last fiscal year.
“We will miss that $1 billion target,” Verghese said. “You will see some trade-offs when you’re slowing down the investment pace.”
Olam will spend between S$1.2 billion to S$1.6 billion in the three years through fiscal 2016, compared with an earlier target of S$2.2 billion to S$2.6 billion, it said. It also wants to cut its gearing ceiling, or the ratio of its debt to equity, to a maximum of 2 times, from 2.5 times, as it seeks to become free cash flow positive from fiscal 2014.
“They played into what the market wanted to see,” Tanuj Shori, a Nomura Holdings Inc. analyst in Hong Kong, said yesterday.
Muddy Waters in a November report questioned Olam’s debt, acquisitions and accounting, and likened it to Enron, the Houston-based company that was the world’s largest energy trader before it plunged into bankruptcy in December 2001. Olam rejected the assertions and sued Block, a case it dropped this month after investor feedback.
“Olam is now saying the right things, and one hopes they’re sincere,” Block said by e-mail yesterday. “However, we question whether this is too little, too late given Olam’s existing debt load and asset quality.”
Temasek Holdings Pte, Singapore’s state investment firm and Olam’s top shareholder, remains comfortable with Olam’s credit position and longer term prospects, it said in a statement after the review was released.
Temasek’s increased stake creates a moral hazard for Olam’s bond investors, who currently assume the investment company will guarantee timely payments, Michael Dee, a former Temasek senior managing director, said in an e-mail.
Olam will also seek to reduce its stake in a proposed fertilizer plant in the Republic of Gabon, originally slated to cost $1.3 billion, to less than 50 percent. It prefers to have “joint control” with strategic partners or industry players, according to a presentation yesterday.
The commodity trader also wants to save as much as S$100 million in costs a year by 2016. Job cuts are not the company’s focus, Anantharaman Shekhar, Olam’s executive director, said yesterday. The company will seek to restructure its wood and dairy businesses, and make its sugar business “more asset light,” it said.