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Muddy Waters may lose credibility unless it proves aggressive claims
By Goh Eng Yeow
23 November 2012
For all his provocative talk, the supposed smoking gun from research firm Muddy Waters’ founder Carson Block to back his outlandish claims about Olam International is still missing.
He has promised a detailed research report on the commodities trader but it has not materialised.
Mr Block made his name last year when he flagged concerns over assets purportedly owned by then market darling Toronto-listed Sino-Forest, whose shareholders included former AIG chief executive Hank Greenberg and hedge fund billionaire John Paulson.
Within a month of his reports, Sino-Forest had plunged 85 per cent, causing huge losses for these well-heeled investors.
But his more recent opinions are apparently not producing the same reactions. Take Focus Media, the Shanghai-based digital advertiser, which came under fire from Mr Block in November last year.
The stock initially sank 39 per cent on claims that the firm had exaggerated its network but it has rebounded 52 per cent since then.
Focus Media refuted Mr Block’s claim, citing a market survey by an independent polling firm showing the number of LCD screens and poster frames reported by the firm was over 99 per cent accurate.
Better still, the firm’s chief executive Jason Jiang offered to take the company private, with the backing of private equity funds, at a price higher than the level it had been trading at prior to coming under attack from Muddy Waters last November. “Carson pointed to a lot of things; what seems to be lacking is a present-day smoking gun,” Mr Eric Jackson, a US-based hedge fund manager was quoted in a Bloomberg article as saying then.
Where Focus Media was concerned, some investors took issue with Muddy Waters for failing to provide new information that was not available in the market.
“(Mr Block) was looking at the stuff in the past and people knew about it. Why bring it up now? They didn’t even bother to check with the company to find out,” noted Mr David Semple, director of international equity at the Van Eck Emerging Markets Fund in New York, who was quoted in the same Bloomberg article.
Unless Mr Block can come up with a comprehensive research report to substantiate the allegations he is now making against Olam, investors are likely to draw the same conclusion here.
Within hours of Mr Block’s first salvo on Monday at a London hedge fund conference, alleging Olam would fail and investors get only “negligible” recoveries, its shares sank 17 per cent in New York over-the-counter trade.
Olam suspended trading on Tuesday morning in Singapore as it awaited the detailed research report Muddy Waters had promised, but resumed trading at 3.30pm when there was no sign the report will be out.
Olam ended the day 7.5 per cent lower, only to pare most of the losses the next day, gaining 5.3 per cent, following a recovery trajectory similar to Focus Media’s. Yesterday, Olam closed 0.6 per cent down at $1.685.
Like Focus’ Mr Jiang before him, Olam chief executive Sunny Verghese complained that the accusations by Muddy Waters had come like “a bolt from the blue”.
He reportedly said: “These guys have no courtesy of presenting their findings or seeking clarification, so it was incredibly surprising that they could go to market with such aggressive public statements.”
Olam has since announced it is taking legal action against Mr Block and Muddy Waters for the statements made in London.
Analysts who closely track Olam said Muddy Waters had, so far, not come up with anything new on the agricultural trader.
Wire reports say Mr Block’s allegations revolve around the value and the accounting treatment of Olam’s biological assets and its level of gearing, or debt.
But Citi Investment Research analyst Patrick Yau noted “investors tracking Olam have typically stripped these off when computing Olam’s growth metrics”.
Biological assets include plantations and forestry concessions.
Even halving this value should not put the company at risk in terms of its banking covenants and gearing limits, he added.
Similarly, CIMB analyst Lee Wen Ching said the concerns voiced by Muddy Waters are not new: “High gearing is a feature of supply chain managers. We strip out hedged inventories to derive adjusted net gearing estimates. Biological assets are also stripped out in our core net profit forecasts.”
So unless Mr Block can come up with something fresh that the analysts here have overlooked, he will find it more difficult to attract believers. Resting on his Sino-Forest laurels is not good enough.