Singapore's Olam Battles Muddy Waters Claims

Singapore commodities trader Olam International defended its accounting practices after attacks by short-seller Muddy Waters which media reports said questioned the way it keeps its books, sending its U.S.-listed shares tumbling.

Muddy Waters Report Faults Olam Accounting, Warns on Risks
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Singapore-listed shares in Olam , which is nearly 16 percent-owned by state investor Temasek Holdings, were halted on Tuesday as the company accused Muddy Waters founder Carson Block of making "baseless and unsubstantiated assertions" against it.

The shares were expected to resume trading at 1530 local time (0730 GMT) in Singapore.

Block questioned the way Olam had booked profits on some of its acquisitions as well as its valuation of its plantations, crops and livestock, the Financial Times reported.

"This is not a black box, this is a black hole," the FT quoted Block as telling an investment conference in London on Monday. No comment was immediately available from Muddy Waters.

Temasek declined comment and directed all queries to Olam.

Started by the Kewalram Chanrai Group in Nigeria, Olam has grown into a diverse agricultural commodities trading company with interests ranging from cocoa and coffee to sugar and nuts.

Chief Executive Sunny Verghese has aggressively led the company's expansion as it takes on larger commodity players such as Noble Group and Wilmar International.

Olam also has an industrial raw materials segment which includes cotton, wood and rubber.

"We are dismayed at the nature and lack of substance of these assertions and opinions about Olam's financial position, particularly as we were not contacted in advance by Carson Block or anyone else from Muddy Waters," Olam said in a statement.

Negative reports from Muddy Waters have decimated shares of several North American-listed Chinese companies such as Sino-Forest Corp, which filed for bankruptcy protection early this year just 10 months after the short-selling research firm said it had exaggerated its assets.

Accounting Questions

Muddy Waters has had a mixed track record, however, and the shares of some of the companies spotlighted in its reports have managed to bounce back.

"Muddy Waters seems to target companies with quite complex business models and accounting structures, so it's difficult to get a handle on what is exactly happening in the company," said David Smith, head of corporate governance at Aberdeen Asset Management Asia.

"Given the complexity of the companies that they target, it means that there's always that lingering doubt regardless of what the company says," Smith said.

Olam's U.S. shares fell 21 percent in after-hours trading following media reports of Block's comments. On Monday, Olam's Singapore shares closed at S$1.74, the lowest in five months and down 18 percent so far this year in a broader market up 12 percent. Wilmar is the worst performer with a 36 percent decline.

Analysts noted that the reporting of transactions in commodity companies was a complicated matter.

"The allegations are actually nothing really new. The first allegation is that Olam is booking profits on transactions before it's clear how deals will work out over time," said James Koh, an analyst at Maybank Kim Eng.

"In many transactions, commodity traders like Olam would book gains once both buyer and seller ends are signed and price risk is hedged. The main risk here is counterparty risk, if one party reneges before the delivery date is due. That's what happened with cotton."

Markets have previously raised concerns over Olam's accounts.

In February 2011, Olam issued a statement denying there were inaccuracies in its accounts after a CLSA analyst raised concerns about internal controls, citing multiple and sometimes significant differences between Olam's audited and unaudited statements. Olam's shares tumbled after the report was issued, falling nearly 20 percent in three days during the final week of February before managing a bounce.

Olam said CLSA analyst Swati Chopra used some examples which were incorrect. Chopra left CLSA a few months after the report was published and now works at a rival bank.

Olam reported a 26 percent rise in first-quarter net profit last week, spurring a pickup in its shares. Out of 21 analysts tracking the stock, 15 have "buy" or "strong buy" ratings, five have "hold" recommendations, and one has a "sell" call, Thomson Reuters data shows.

Olam's 5.75 percent bonds due 2017 were trading 10 points down at 87.5/88.5 on Tuesday.