Olam (JP Morgan)

Olam: JP Morgan Credit Research note that valuation on biological assets is not very easy to assess as it depends on a number of subjective factors, nevertheless Olam describes that its biological assets (plantations, annual crops and livestock) are stated at fair value less point of sale costs. House would await clarification by Olam in response to the allegations before making detailed comment, but if house were to hypothetically assume only biological assets are overstated and write them down and book value of equity completely, unadj. net debt/equity goes up from 2x as of Sep-12 to 2.4x. While such a write down, if any, would possibly raise concerns of potential aggressive accounting policies, the resulting change in gearing from this write down itself would not be overly concerning. Add that house have been holding a view that even 2x looks a bit on the high side but also highlight that historically the co has maintained much higher net debt/equity ratios. E.g, it had net debt/equity of 3.7x as of Jun-08 and 2.5x in Jun-09. Olam’s liquidity seems fair with short-term debt of $3.8b which could be more than covered by S$1.4b cash and about $3.7b of readily marketable inventory. Olam also has secured receivables of $1.3b and another bank line of $4.3b as of Sep-12.