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Thursday, January 10, 2013

Olam cut to sell by UBS on concern financial health worsens (Updated)


Olam International, the commodity trader targeted by short-seller Carson Block, was cut to sell from buy by UBS AG amid concern that the company’s financial health may be deteriorating.

UBS analysts Andreas Bokkenheuser and Anubhav Gupta reduced Olam’s 12-month target price by more than half to $1.33 from $2.95, they said in a report today. Shares of Olam, the world’s second-largest rice trader, fell as much as 1.6% before closing unchanged at $1.605 in Singapore today.
UBS becomes the fifth brokerage to downgrade Olam since Block first questioned the company’s accounting methods at a London conference in November. He later rated it a “strong sell” in a report by his research firm Muddy Waters LLC and said the company may fail. Singapore-based Olam has refuted Block’s claims and said last week it’s in the best financial health since its 2005 initial share sale.

A bankruptcy analysis “suggests that Olam’s financial position has deteriorated to below financial health levels, although it remains above distress levels,” UBS’s Bokkenheuser and Gupta wrote in the report.

Olam’s earnings quality has deteriorated as the gap widens between earnings reported by Olam and earnings adjusted for items including changes in fair value of biological assets, negative goodwill, and government grants, according to UBS. Assumptions in determining fair value put earnings quality at risk, the analysts said.
UBS cut its earnings-per-share estimate for Olam for 2013 by 45%, by 41% for 2014 and 44% for the year after, according to the report.

Olam said on Nov. 28 it faces no risk of insolvency. The company is “comfortable” with its debt, it said last week, adding that it had $3.42 billion of equity and $6.99 billion of net debt as of Sept. 30. It had $10.71 billion in cash, readily traded assets and undrawn credit lines as of that date, Olam said.

The commodity trader has provided answers to questions raised by UBS, Aditya Renjen, Olam’s general manager of investor relations, said today by phone from Singapore. The company “has been very clear” about Olam’s financial health, he said.
Olam said Dec. 3 it will offer US$750 million ($921 million) in bonds and as much as U$500 million in warrants. Temasek, Singapore’s state- owned investment company, said it would back Olam’s bond offering and will buy any rights not taken up by other investors. Michael Lim Choo San, a non-executive, independent director, invested in the rights offer, according to a regulatory statement today.

Borrowing costs are also an area of concern as the company may need to refinance its debts in the next two years, the UBS analysts said. Olam’s current covenants based on reported earnings are 4.5 times net debt-to-equity ratio, 1.5 times interest cover and US$1.2 billion minimum net worth, they said.

The stock lost 27% last year, making it the second- worst performer on Singapore’s benchmark Straits Times index. Ten analysts recommend buying Olam stock, 4 advise selling it and 6 rate it a hold, according to data compiled by Bloomberg.

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