Thursday, November 29, 2012

Olam Spat with Muddy Water

The above hog the headlines for the last one week. I am vested in Olam and remain to be so. The incident actually give me a lot of opportunity to know and understand the business of Olam in greater detail than in the past.

There is no doubt that Muddy Water is acting in concert with some hedge funds to make monies out of their short positions in Olam. I think they might have made some but not significant as Olam has manage quite well to contain the crisis.

I read both Muddy Water report and Olam subsequent reply. Most of Muddy Water so called evidence are rather sporadic and incomplete. They tend to highlight certain discrepancies without being able to give the complete picture. It is often easy to pick out a piece of information to support your case but leaving out other equally information that can also invalidate your statement.

However, having said the above, I think Olam would do well to think and recalibrate its aggressive target of reaching $1b Net Profit by 2016. It may be worth the while to go slower and focus more tightly on ongoing projects.

The understanding I gain from reading both reports is that Olam typically like to pick underperforming assets at what they deem attractive prices. The assets are underperforming maybe due to bad management, lack of capital, etc. Then they wll bring in their expertise and try to turn it around. It will take some effort. If they succeed, the gains are tremendous but require hard work and a little bit of luck. Success is often not immediate or even guaranteed.

I also think Olam would need to convey more info on the 35+ initiatives a bit more clearly to investors. I do not expect all the initatives to succeed. I just need more to succeed than fail on the balance so that the overall profit objectives can be met. Among all the cases that Muddy Water bring out in their report, I would think Olam has not replied satisfactory on the Gabon Urea initiative.I like Olam to give detailed statistics on the NZ-URUGUAY diary project regularly as this is one of the project performing below plan.
I like to see EBIT numbers for Olam Tomatoes aka SK Foods.

Also, here is no need to give detailed info on all initiatives but the 'big' ones do matter. For investors, my advice is do not panic too easily. Try to understand the company as well as you can and in some cases, a crisis may be excellent an opportunity.

The stock price is not a major problem. A credit freeze would be more painful as Olam need huge capital to function being in the commodity business where they hold large liquid inventories.

Finally, I believe the worst is over between Olam and Muddy Water saga. Carson will move on to look for new targets.

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