Muddy Waters Strikes Again: Singapore's Olam Slumps on Questioned Accounting

Olam International, one of Asia's largest agribusiness groups, fell the most in six months in Singapore trading following an attack made by research firm Muddy Waters LLC.


According to Bloomberg, Olam's shares declined 7.5 percent to S$1.61 at the close, the lowest since May 16, while its bonds also fell in Asian trade.


Muddy Waters' Carson Block questioned the  agricultural commodity trader’s accounting methods. Block alleges that Singapore-based company is booking profits on transactions before it’s clear how the deals will work out.


Block told the Ira Sohn Investment Conference in London that Olam is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments.


In its defence, Olam issued a statement saying it “strongly rejects the assertions made by Carson Block and or Muddy Waters.”


“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.”


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


“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 to Bloomberg. “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.”


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


Net gains on biological assets accounted for S$111 million or 30 percent of fiscal 2012 earnings. Biological assets account for 6.6 percent of Olam’s assets and about 20 percent 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, told Bloomberg. CIMB’s Lee also says she excludes biological assets when she makes profit forecasts.


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