Olam victim of market ignorance?

Just a day after Olam’s stock was sharply sold down following a critical report from CLSA, at least two investment houses have come out to say that the stock of the commodity trader was dumped by a market which did not understand its business.

Comments

Guanyu said…
Olam victim of market ignorance?

By VEN SREENIVASAN
24 February 2011

Just a day after Olam’s stock was sharply sold down following a critical report from CLSA, at least two investment houses have come out to say that the stock of the commodity trader was dumped by a market which did not understand its business.

In a research note yesterday, HSBC noted that ‘Olam had a complicated business that is poorly understood’. HSBC analyst Thilan Wickramasinge also noted that the company’s Wednesday morning rebuttal of a damning CLSA AsiaPac Markets report showed that it was sound and ‘not one scrambling to cover problems . . . companies that cover up irregularities do not often do it with the speed and clarity that Olam has’.

Meanwhile, in an even more colourfully worded comment, IIFL Institutional Equities said: ‘This may well be Nigerian scam at its finest: a disgruntled rival trader spun a tale; a brokerage took the bait and speculated that Olam’s business is built on Nigerian export incentives; and voilà , Olam share price was down 9.3 per cent in a single day. We found the contention to be absurd, given that Nigeria is no longer a key origination country for Olam. The company’s operations are robust and its gearing is within the comfort zone.’

All this comes just two days after Olam dived 9.3 per cent after CLSA’s Swati Chopra raised concerns about Olam’s excessive dependence on export subsidies received from Nigeria. CLSA said Nigerian incentives accounted for 30-40 per cent of Olam’s profit. It also expressed concerns about Olam’s balance sheet and hinted at potential irregularities in its accounting, adding that the company was generating negative Economic Value Added (EVA) or Economic Profit (EP).

Yesterday, in a point-by-point rebuttal, Olam listed all its accounts at subsidiary and consolidated group level, and showed how they reconciled with each other. It said re-classifications led to the differences in unaudited accounts and the Annual Report numbers which CLSA highlighted. It also showed that its EVA/EP had risen from $109.3 million in 2007 to $237.2 million last year. It said that while it started from Nigeria, it was now well diversified in terms of both geographic originations (65 countries) and products, and added that overall profit contribution from Nigerian exports was single digit.

Olam ended yesterday’s session down another seven cents or 2.6 per cent at $2.56.

This whole episode raises two important questions.

First, how well do analysts really understand the nature of the commodity trading business? Commodity trading is a fast-moving and complex business where hedging practices, pricings, physical trading and policies on recognition of profit can change rapidly and vary widely from business to business, and product to product. Commodity traders can also gear up aggressively to finance their working capital. In the case of Olam, its debt-to-equity ratio can rise from two times to almost three times. But it has remained well under the bank-limited 4.5 times.

Secondly, how much effort do companies put into really educating the market in general - and analysts in particular - about their business? Based on Olam’s clarifications, the CLSA’s analysis seemed totally off the mark. But it was only after its stock was battered down some 10 per cent and panic set-in that it saw fit to educate the market and clarify its position. There is nothing like a bit of a shock to get a company scrambling to engage analysts and media and explain the intricacies of its business.

But the bottom line is this: Olam appears to be on solid ground and sound footing. It recently reported that its net profit before exceptional gain for the second quarter ended Dec 31, 2010 grew 65.6 per cent from a year ago to $112.2 million. Including exceptional gain, the net profit attributable to shareholders for the quarter fell 8.4 per cent to $145.44 million.
Guanyu said…
IIFL sees the company’s earnings growing 28 per cent annually over the next three years.

‘The Nigerian scam has beaten down Olam’s forward P/E to 17x,’ analysts Billy Wang and Zuo Li noted yesterday. ‘We are convinced that this presents an excellent buying opportunity. We reiterate ‘buy’ with target price of $4.43.’

But most investment houses are positive on Olam, anyway. Until CLSA gave its take.

While the troubles in the Middle East and North Africa have depressed most stocks, including Olam, most investors have little doubt that the CLSA report was the biggest factor in wiping out $630 million or 10 per cent off Olam’s market value. One wonders whether investors could have been spared this additional pain.

Popular posts from this blog

Two ex-UOBKH staff charged with lying to MAS over due diligence reports on a Catalist aspirant