Muddy Waters: Game over for Olam if Temasek pulls out

[SINGAPORE] Almost a year after it first released its report on Olam International, shortselling research firm Muddy Waters is not letting up on the agri-commodities trader yet.

"My view is that if Temasek decides tomorrow that it wanted out of this investment, it would be game over within months for them, without Temasek's backstop," its research director Carson Block told The Business Times in his first visit to Singapore since launching its report against Olam last November.

"For us, the be-all and end-all when we're looking at Olam is free cashflow. It's a company that seems to be in general wholly-incapable of generating free cash flow. It takes on more and more debt, and eventually, this debt has to be repaid."

The shortseller had late last year accused Olam of relying on accounting tricks to boost its bottomline, spending too much on poor quality assets, and said it valued Olam on a "liquidation basis".

The attack, the first of its kind in Singapore, caused Olam's shares to fall 20 per cent to a low of $1.395 at the height of the saga, and subsequently led to an overhaul of Olam's plans after a strategic review.

The firm said that it now aims to be free cashflow positive from the 2014 financial year onwards, a year earlier than its original target of FY2015, and has laid out plans to cut planned capital expenditure, monetise its balance sheet and divest certain assets.

Mr Block said of these: "The company's saying the right things. The question is whether it actually does those things. It might have become slightly more selective, but you still see substantial cash burn in the company."

"Maybe they can finance their way out of it, however many more times, but there will come a day - it might be sooner, it might be later - when the market will not be open to this company."

In August, Olam reported a negative free cashflow of $316 million for the 2013 financial year, compared with negative $661 million a year before.

Olam's net gearing now stands at 1.93 times, as compared to 2.20 times the previous quarter, and 1.81 times at the end of FY2012.

When asked if Muddy Waters still retains a short position on the firm, Mr Block said it does not usually comment on its positions aside from the release of its reports.

But in a hint that Muddy Waters is still short on Olam, he added: "Obviously we're usually used to winning within a shorter period of time. Fortunately for many of the names we've shorted in the past, we haven't really had to think to answer that question. Olam is different."

Shares for Olam, and Muddy Waters' target after that, US cellphone antenna operator American Towers, had not dropped as much as the shortseller's earlier targets, leading to talk that its influence has faded.

In a sign that its streak of lacklustre results is ending, however, Muddy Waters' latest report launched last Thursday against Chinese mobile services provider NQ Mobile led to its shares falling more than 60 per cent within an hour.

Temasek moving into the ring to support Olam was a move that the shortseller had not foreseen, Mr Block admitted.

"We looked at it from a purely economic standpoint, which is that it is not an investible company, and maybe we ignored the political elements of this, the psychological element, the issues that were more systemic in Singapore that could interest a sovereign in a bailout," he said.

Two weeks after Muddy Waters spoke out against Olam, Temasek, then the firm's second-largest shareholder, threw its weight behind Olam by agreeing not just to take up its pro-rata entitlement of Olam's US$1.25 billion bonds-cum-warrants rights issue, but also sub-underwrite it. The issue was eventually 1.1 times subscribed.

Temasek has also since then progressively increased its ownership of Olam, from an initial 16.3 per cent before the Muddy Waters attack to 24.07 per cent now.

In Mr Block's view, Temasek had stepped in because of the wider implications that an Olam collapse would have posed to the commodity-trading industry in Singapore.

"If Olam had failed, what would the banks have done with the other commodity houses that are borrowing in Singapore?" he said. "It's reasonable to assume that if the banks had to write off losses to Olam, you could have a real funding freeze for the commodity trading industry in Singapore. "

Temasek's spokesman Stephen Forshaw said the Singapore investment company's reason for investing in Olam remained the same: "We have been, and remain, supportive of its publicly known strategy to take the opportunity, in recent years, to add on more upstream and midstream capabilities and capacities.

"We also acknowledged that no business is without risks. But that said, at the time of the investment, we were comfortable with Olam's credit position and longer term prospects, and were very pleased to have another opportunity to invest in the company, alongside others."