Olam (UOBKayhian)

Olam: UOB Kay Hian has its views on the ongoing saga. Below are house key takeaways: Whats New: • Olam was led to believe that an 80-page Muddy Waters report would be released pre-market. • Olam noticed significant short positions in its stocks, especially over the past few months. Olam appears to be the "most shorted stock" in SG. • Olam's investment relations team held a investor meeting on 1 Nov with two hedge funds. According to the co, Carlson Block attended that meeting, but introduced himself as an investor in the two hedge funds. Mgt believes there are parties acting in concert to profit from a decline in the co's share price. Co reserves the right to take legal action should there be evidence of market manipulation. They also believe certain hedge funds have approached Olam's key investors to sell the stock. • Mgt believes Block's comments were made to "create panic among shareholders". On allegations of aggressive accounting/debt levels: • Banks and creditors have not pulled any credit lines from the company. • Accounting for net gains on fair value on biological assets is "not by choice", by based on financial reporting standards. Assumptions to value assets have been "very conservative". Gains are likely to reverse to losses as assets mature in later years. US$1b earnings target for the group have taken into account these losses. • Olam will prepare a detailed response if Muddy Waters releases its report. • The group has not bought back shares or bonds today. Mgt is of the view that shares trade at deep discount to intrinsic value and could be a better investment compared to other investment opportunities available to the group. • Olam has S$4b of unutilised credit lines and is prepared to buy back stock. The share buyback mandate was renewed in late October for a buyback of up to 10% of Olam's shares. UOB Kay Hian’s View • The stock is likely to trade sideways pending further clarification and the Muddy Waters report if it is eventually released. Based on queries by analysts during the conference call, believe there could still be a lack of understanding in the co due to its complexity and diversified geographies/products, participation at various levels of the supply chain. This may hinder efforts to remove uncertainty that has been created over the stock. • Separately, note that Muddy Waters has had a mixed track record. While its call on Sino-Forest was correct, its recent calls on New Oriental Education & Technology Group and Focus Media have been less accurate so far. • Olam's request for a trading halt could have prevented a collapse of the stock and short positions may not have had the opportunity to be covered. Contrarian investors may be attracted to Olam's stock due to high short interest on the stock. The stock could reverse its losses if these short positions have to be covered. • Short interest almost doubled to 62m from end-May earlier this year to mid-October, before declining slightly to 58m in late October. Overall, house maintain BUY on the stock pending further developments. TP of $2.38 remains unchanged and pegged to 13.5x average FY13/FY14 PE(core earnings).