The Olam issue seems to be very "hot" in Singapore. Many investors have exposure either through their equity or bond holdings. Valuebuddies has the following thread on it. From other sources I received the following information.
The most well
publicized Muddy Waters success is Sino Forest where the trees
obviously weren't where they were supposed to be. However, he's tried it 3
other times and here's the track record:
Company MW RPRT Pre-report Day-after
SPRD US 28/6/11 $18
FMCN US 21/11/11 $25
EDU US 18/7/12 $22
Outside of Sino Forest, the last 3 target stocks are higher or at similar
levels within months of MW reports. Just stating a fact here.
The OLAM 4.07% Senior
Bond maturing on 12-Feb-2013 is yielding 18.72% to maturity! Current
Offer price at 97...
OLAM 6% 2018 now
offer at 90. Yield to maturity is 8.22%.
The million dollar
question is, will OLAM default in the next 2.5 months?
The primary issue is
their recognition of biological gains (Olam has booked
SGD191m of these gains in the past 2-years; 24% of report PAT). Biological
gains are the yearly changes in net present value of future income flows on
group’s upstream crop and livestock investments. These valuations use
assumptions on commodities prices, productive life of assets, yields,
and discount rates. According to Muddy Waters, if Olam does not deliver on
their investments, the profits recognized as biological gains will amount
nothing. Muddy Waters also claims the valuations assumptions are
Biological gains are a requirement under IFRS for Singapore-listed
and have been in place for the past 4-years. The aim of this standard is to
make a fair-representation of a company’s biological investments as these
typically have long gestation periods before revenue delivery while costs
incurred from the start.
All palm oil plantation companies listed on SGX follow this. In our view,
whether the assumptions used are aggressive or whether biological gains are
recognized as earnings is a moot point. These gains (and losses) are
out by a majority of the Street in arriving at core-earnings for Olam as
as all other SGX listed plantations. Further, in their annual report (p142
2012), Olam discloses all the assumptions that go in to coming up with
valuations – which are signed off by the auditors (Ernst & Young) and
the case of livestock by independent valuers.
Biological gains come in two forms: (a) operational – changes in yields assumptions etc and (b) non-operational – changes in pricing assumptions,
discount rates. Olam is the only company in our coverage that actually
discloses these separately. We will comment further once we have a look at
the Muddy Waters report which is scheduled to be released Tuesday morning