Olam (UOBkayhian)

Olam: UOB Kay Hian gives its view in an email to sales. House note that the key difference of Muddy Water's comments on Olam is that it believes accounting is aggressive (rather than fraudulent). However, Block also said Olam will fail and recoveries will be "negligible." Net gains on biological assets accounted for S$111m or 30% of FY12 (ending Jun-12) earnings. House assumptions for Olam's net gain from changes in fair value of biological asset for FY13, FY14, and FY15 are S$101m, S$93m, and S $61m respectively, accounting for 24%, 17% and 9% of group earnings. Olam has previous guided for the gains to decline as its almond orchards mature and start yielding. Olam has also consistent maintained its position over the past two years that the gains on biological assets are a result of an increase in productive capacity and not changes in commodity price assumptions. Biological assets account for 6.6% of assets and approximately 20% of shareholders equity. A significant part of these assets are from Timbercorp almond orchards in Australia which Olam acquired after the GFC at distressed valuations. Other biological assets include dairy farming (e.g. NZFSU, Rusmolco). While the accusations are serious, believe Block's argument is inconsistent as the group will not fail even if the entire value of its biological assets is written off. Note however that the stock is likely to see near term impact from this piece of news and could trade lower towards its Net Asset Value of $1.35 before more clarity emerges. However, note that the group's balance sheet is well-positioned for share buybacks and is likely to re-commence the program should its stock price fall sufficiently.