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Olam Buyout Caps 55% Rally As Short-Seller Block Praises Change
Perspective | 21 March 2014
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Olam International, the Singapore-based commodities trader that short-seller Carson Block has said is worthless, just got a lot more valuable.

Olam rose 12 percent to $2.23 on 14 March after Breedens Investments, a unit of Temasek Holdings, offered that much for the publicly held equity. The stock was trading at $1.44 five weeks ago, making its 55 percent advance since then the biggest for any comparable period since January 2009, according to data compiled by Bloomberg.

While Block expressed puzzlement with the surge in the shares before the offer, the rally came amid a jump in the price of coffee, a commodity in which Olam is one of the world’s three biggest traders. Block, the founder of Muddy Waters, praised management for addressing some of the shortcomings he highlighted in November 2012.

“Olam gets credit for taking steps to mitigate some of the issues we identified,” Block wrote in an e-mail to Bloomberg News on 14 March. “The Singapore sovereign wealth fund’s timing is interesting given that Olam has US$1.2 billion of debt maturing this year and is still burning cash, and that the stock has inexplicably outperformed in the past month.”

While Block was Olam’s most vocal critic, he has not disclosed whether his bets have been profitable. Since he said he was betting against the company in November 2012, Olam has fallen as much as 20 percent and risen as much as 28 percent.

Block’s Targets
Olam is among at least 10 targets which Block has pursued after he began to publish his research in June 2010. He gained fame for his short-selling calls in Asia after regulators halted trading in four of the first five companies he wrote about. His accusations of fraud at Sino-Forest Corporation, a Chinese plantation company listed in Canada, led the company to file for bankruptcy protection.

“This essentially throws his short thesis out the window, but it’s unclear if he’s losing money,” Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co., said by phone. “The stock has been supported by good second-quarter results, improving fundamental factors and maybe there’s been leakage in the deal process.”

Average daily trading for Olam in the five days through 11 March was 12.7 million shares on the Singapore stock exchange, the highest in almost a year, data compiled by Bloomberg show. Coffee futures rose almost 2 percent during that stretch and are up 42 percent in the past year.

Noble Group, Asia’s biggest commodity trader by sales, gained 19 percent between 4 February and 11 March.

Justified Gains
The rally in Olam shares is justified given the company’s outlook, according to Tanuj Shori, a Hong Kong-based analyst at Nomura Holdings, who has a ‘Buy’ rating.

Earnings before interest, tax, depreciation and amortisation rose to 7.3 percent of sales last quarter from 5.9 percent a year earlier, according to data compiled by Bloomberg.

“Olam results were very strong and commodity prices have been rising,” Shori said by phone. “Shares definitely deserve to be up. Growth is picking up, particularly profit margins.”

Out of 13 analysts who issued reports on Olam in February, seven raised their target price by an average of 10.4 percent, the Singapore exchange said in a release on 16 March.

Trading of shares in Olam as well as Noble and Wilmar International “were within the price ranges set out in the research reports, suggesting they were trading within the general market view of these stocks with Olam shares reflecting a more positive market view,” the exchange added.

Olam declined to comment, saying it can only speak through board-approved announcements because of the takeover offer. Jeffrey Fang, a spokesman for Temasek, declined to comment.

Value Rebound
Before the takeover offer was announced, Olam’s shares traded at 12 times projected 12-month profits, near the benchmark measure’s 13. Olam’s earnings multiple dropped as low as 7.8 in December 2012, the month after Block announced he was betting against the company’s shares.

Olam’s rally followed gains in Hong Kong’s ChinaVision Media Group and Australia’s Leighton Holdings before takeover announcements this month. The commodity trader is the most-shorted company in Singapore’s benchmark equity measure.

Block announced he was betting against Olam shares at an investor conference in London in November 2012. His Muddy Waters firm, which rose to prominence starting in 2011 with bearish bets and research on Chinese companies trading in the US, issued a 133-page report in November 2012 saying Olam was “likely to fail.”

‘Lingering Doubts’
All along, Olam has said Block was wrong. As well as adding Olam shares, Temasek also backed a US$750 million bond sale by the commodity trader. Olam said in December 2012 it planned to sell bonds and warrants to address any “lingering doubts” about its finances. The investment firm agreed at the time to buy any rights not taken up by other investors.

Olam has about $7.4 billion of bonds and loans outstanding, according to data compiled by Bloomberg. Some $1.2 billion is due before the end of this year and another about $2.4 billion before 2017, the data show.

Olam’s short interest rose to 11.2 percent of its free float on 12 March from 10 percent on 24 January, according to Markit Group data. That makes it the highest on the 30-member Straits Times Index. Short interest peaked at 19.9 percent of free float in November 2012, when Muddy Waters revealed it was betting against the stock, the data show.

“Short sellers are potentially exposed to a squeeze while needing to cover their positions,” Abhijit Attavar, an equity analyst at Jefferies Singapore, wrote in a report.

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Business: Co is engaged in sourcing, processing, packaging and merchandising agricultural products. [FY18 Turnover] Food staples & packaged foods (47.6%), confectionery & beverage ingredients (23.4%), industrial raw materials, infrastructure & logistics (14.9%), edible nuts & spices (14.1%).

Insight: May-19, 1Q19 revenue rose 16.7% due to increased t... Read More
Wilmar Int'l  3.840 -0.06 -1.54%   
Business: Co's integrated agribusiness model encompasses the entire value chain of the agricultural commodity processing biz, from origination and processing to branding, merchandising and distribution of a wide range of agricultural pdts.

Insight: May-19, 1Q19 revenue fell 6.2% to US$10.4b driven ... Read More
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Business: Flagship unit of Alibaba Group's entertainment arm. [FY17 Turnover] Internet-based promotion & distribution (83.3%), content production (14.4%), integrated development (2.3%).

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