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Muddy Waters Strong Sell - Olam

Muddy Waters Strong Sell - Olam

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Published by Devon Shire
Muddy Waters Strong Sell - Olam
Muddy Waters Strong Sell - Olam

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Published by: Devon Shire on Nov 27, 2012
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Muddy Waters, LLC
www.muddywatersrsearch.cominfo@muddywatersresearchDirector of Research: Carson C. Block, Esq.
Terms of Service:
By downloading from, or viewing material on, this website you agree to the following Terms of Service. You agree that use of MuddyWaters LLC’s research is at your own risk. In no event will you hold Muddy Waters LLC or any affiliated party liable for any direct or indirecttrading losses caused by any information on this site. You further agree to do your own research and due diligence before making anyinvestment decision with respect to securities covered herein. You represent to Muddy Waters that you have sufficient investmentsophistication to critically assess the information, analysis and opinion on this site. You further agree that you will not communicate thecontents of this report to any other person unless that person has agreed to be bound by these same terms of service. If you download or receive the contents of this report as an agent for any other person, you are binding your principal to these same Terms of Service.
 You should assume that as of the publication date of our reports and research, Muddy Waters, LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors and/or their clients and/or investors has a short position in all stocks (and/or options, swaps, and other derivatives related to the stock) andbonds covered herein, and therefore stands to realize significant gains in the event that the price of either declines. We intend tocontinue transacting in the securities of issuers covered on this site for an indefinite period after our first report, and we may belong, short, or neutral at any time hereafter regardless of our initial recommendation
.This is not an offer to sell or a solicitation of an offer to buy any security, nor shall Muddy Waters offer, sell or buy any security to or fromany person through this site or reports on this site. Muddy Waters, LLC is not registered as an investment advisor in any jurisdiction.If you are in the United Kingdom, you confirm that you are accessing research and materials as or on behalf of: (a) an investmentprofessional falling within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "FPO"); or (b)high net worth entity falling within Article 49 of the FPO.Our research and reports express our opinions, which we have based upon generally available information, field research, inferences anddeductions through our due diligence and analytical process. To the best of our ability and belief, all information contained herein isaccurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer.However, such information is presented “as is,” without warranty of any kind, whether express or implied. Muddy Waters, LLC makes norepresentation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results tobe obtained from its use. Further, any report on this site contains a very large measure of analysis and opinion. All expressions of opinionare subject to change without notice, and Muddy Waters, LLC does not undertake to update or supplement any reports or any of theinformation, analysis and opinion contained in them.You agree that the information on this website is copyrighted, and you therefore agree not to distribute this information (whether thedownloaded file, copies / images / reproductions, or the link to these files) in any manner other than by providing the following link:http://www.muddywatersresearch.com/research/. If you have obtained Muddy Waters research in any manner other than by download fromthat link, you may not read such research without going to that link and agreeing to the Terms of Service. You further agree that any disputearising from your use of this report and / or the Muddy Waters Research website or viewing the material hereon shall be governed by thelaws of the State of California, without regard to any conflict of law provisions. You knowingly and independently agree to submit to thepersonal and exclusive jurisdiction of the superior courts located within the State of California and waive your right to any other jurisdictionor applicable law, given that Muddy Waters, LLC has offices in California. The failure of Muddy Waters, LLC to exercise or enforce any rightor provision of these Terms of Service shall not constitute a waiver of this right or provision. If any provision of these Terms of Service isfound by a court of competent jurisdiction to be invalid, the parties nevertheless agree that the court should endeavor to give effect to theparties’ intentions as reflected in the provision and rule that the other provisions of these Terms of Service remain in full force and effect, inparticular as to this governing law and jurisdiction provision. You agree that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to use of this website or the material herein must be filed within one (1) year after such claim or cause of action arose or be forever barred..
Use of Muddy Waters reports is limited by the Terms of Service on its website, which are asfollows. To be authorized to access such reports, you must agree to these terms, regardless of whether you have downloaded its reports directly from this website or someone else hassulied the reort to ou without authorization from Mudd Waters.
 
Page 2 of 133
Underwater – US$49.2 million Olam rice farm on the Benue River (Nigeria) flood plain
.
 
Olam runs a high risk of failure. Its “asset heavy”strategy appears to be an off-the-rails CapEx andacquisition binge. Management talks about the“gestation” of these projects, but our research makesclear that they are marred by incompetence and perhapssignificant misconduct. The vast majority of theacquisitions we have researched are of low quality assetsthat appear to bring little more than cosmetic benefits toOlam. In short, these projects are “pie in the sky” thatwe strongly believe are destroying substantial amountsof capital.
 
Bondholders in particular should be asking where their money goes (and how will they get it back). Olam hasspent S$571.0 million less on acquisitions thanannounced. However, it has spent S$996.2 million onunattributed non-acquisition CapEx – most of it sinceFY2011. One possible interpretation is that Olam isdoing far more greenfield projects than realized, whichgreatly increases its risk profile. Another possibleinterpretation is that Olam has problems with internalcontrols and significant cash leakage.
 
Over the years, Olam has committed a shocking number of accounting gaffes. We can conceive of two possibleinterpretations of its accounting track record – either itsaccounting functions are blithely incompetent; or, therecould be malfeasance. (Both could be true as well.) Theformer interpretation has ominous implications for Olam’s oft self-promoted ability to manage risk. Thelatter interpretation obviously has even more direimplications.
 
We believe it is instructive to view Olam through thelens of failed US trader Enron Corp. There are a number of material similarities in the way their businessesdeveloped, and their action.
 
We value Olam on a liquidation basis because our opinion is that it is likely to fail. In the event of aliquidation, we estimate the present value of unsecured bonds to be 14 to 33 cents on the dollar. The equitywould likely be wiped out, or given “nuisance value” at best.
Company:
Olam InternationalLtd.
 Ticker:
SGX O32; OTC OLMIY/ OLMIF
 Industry:
AgriculturalCommodity Trading &Processing
Thesis:
Strong Sell
Report Date:
 November 27, 2012
Price:
S$1.66
 Market Cap:
S$4.0 billion
Float:
67.4%
Avg Volume:
15.5 million shares
 Avg Volume:
15.5 million shares
 
 
Page 3 of 133
TableofContents
INTRODUCTION......................................................................................................................................5
SUMMARY.................................................................................................................................................6
O
LAM
S
A
GGRESSIVE
A
CCOUNTING
M
ASKSITS
P
OOR
P
ERFORMANCEAND
I
NCENTIVIZESITTO
S
PEND
I
NCREASINGLY
P
RECIOUS
C
ASH
..............................................................................................................................6
O
LAM
S
L
OOMING
S
OLVENCY
C
RISIS
.....................................................................................................................6
O
LAM
S
T
RADING
B
USINESS
A
PPEARSTOBEA
F
AILING
B
USINESS
M
ODEL
..................................................7
O
LAMISA
B
LACK
B
OX
..............................................................................................................................................7
I
S
O
LAM
S
A
CCOUNTING
C
REDIBLE
?.....................................................................................................................8
O
LAM
S
C
AP
E
XIS
O
FFTHE
R
AILS
..........................................................................................................................8
V
IEWING
O
LAMTHROUGHTHE
E
NRON
L
ENS
......................................................................................................9
V
ALUATION
.................................................................................................................................................................9
REPORTBACKGROUND........................................................................................................................9
OLAMBACKGROUND.........................................................................................................................10
RESEARCHMETHODOLOGY.............................................................................................................10
OLAM’SAGGRESSIVEACCOUNTINGMASKSITSPOORPERFORMANCEANDINCENTIVIZESITTOSPENDINCREASINGLYPRECIOUSCASH..............................................11
N
EGATIVE
G
OODWILL
...........................................................................................................................................12
TT
T
IMBER
A
CQUISITION
I
LLUSTRATESHOW
O
LAM
G
ENERATES
N
EGATIVE
G
OODWILLTHROUGH
R
EVALUATION
.........................................................................................................................................................14
OLAM’SLOOMINGSOLVENCYCRISIS............................................................................................16
OLAM’STRADINGBUSINESSAPPEARSTOBEAFAILINGBUSINESSMODEL...................22
C
ASH
B
URN
..............................................................................................................................................................22
N
IGERIAN
E
XPORT
I
NCENTIVES
..........................................................................................................................22
EEG
E
FFECTON
P
ROFITABILITY
.........................................................................................................................23
A
RE
EEG
S
S
USTAINABLE
?....................................................................................................................................25
G
RANT
I
NCOMEIN
G
ABON
....................................................................................................................................25
C
ONCLUSION
............................................................................................................................................................26
OLAMISABLACKBOX.......................................................................................................................26
L
EVEL
3
D
ERIVATIVES
W
HO
D
ECIDES
H
OW
M
UCH
T
HESEARE
W
ORTH
?..............................................30
L
EVEL
3
D
ERIVATIVESANDTHE
B
ALANCE
S
HEET
..........................................................................................30
L
EVEL
3
D
ERIVATIVESANDTHE
I
NCOME
S
TATEMENT
..................................................................................32
ISOLAM’SACCOUNTINGCREDIBLE?.............................................................................................33
OLAM’SCAPEXISOFFTHERAILS..................................................................................................49
A
CQUISITIONS
:
A
LL
H
AT
,
N
O
C
ATTLE
................................................................................................................50
N
ON
-A
CQUISITION
C
APITAL
E
XPENDITURE
S
O
B
LACK
H
OLESDO
E
XIST
!...............................................51
CROWNFLOURMILL:ACASESTUDYINOVERPAYINGANDMISLEADINGINVESTORS53
O
LAM
B
OUGHT
M
ASSIVELY
O
VERVALUED
A
SSETS
,
ANDTHEN
O
VERVALUED
T
HEMBY
A
NOTHER
25%...................................................................................................................................................................................53
S
TEP
1:
CY2007
UPWARDVALUATIONOF
257.2%......................................................................................53

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