Muddy Waters Initiates Coverage on Olam International
Olam runs a high risk of failure. Its "asset heavy" strategy appears to be an off-the-rails CapEx and acquisition binge. Management talks about the "gestation" of these projects, but our research makes clear that they are marred by incompetence and perhaps significant misconduct. The vast majority of the acquisitions we have researched are of low quality assets that appear to bring little more than cosmetic benefits to Olam. In short, these projects are "pie in the sky" that we strongly believe are destroying substantial amounts of capital.
Bond holders in particular should be asking where their money goes (and how they will get it back). Olam has spent S$571.0 million less on acquisitions than announced. However, it has spent S$996.2 million on unattributed non-acquisition CapEx - most of it since FY2011. One possible interpretation is that Olam is doing far more greenfield projects than realized, which greatly increases its risk profile. Another possible interpretation is that Olam has problems with internal controls and significant cash leakage.
Over the years, Olam has committed a shocking number of accounting gaffes. We can conceive of two possible interpretations of its accounting track record - either its accounting functions are blithely incompetent; or, there could be malfeasance. (Both could be true as well.) The former interpretation has ominous implications for Olam's oft self-promoted ability to manage risk. The latter interpretation obviously has even more dire implications. We believe it is instructive to view Olam through the lens of failed US trader Enron Corp. There are a number of material similarities in the way their businesses developed, and their actions.
We value Olam on a liquidation basis because our opinion is that it is likely to fail. In the event of a liquidation, we estimate the present value of the debt to be 14 to 33 cents. In a liquidation, the equity would likely be wiped out, or given "nuisance value" at best.
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