{ "docId": "019dd923-622c-750b-8b95-ffce19e398a1", "docSlug": "44ffa60fe44d", "documentTitle": "Olam International (OLAM)", "authorId": "51_Muddy_Waters", "authorName": "Muddy Waters", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2012-11-30 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 4, "pageCount": 8, "prevPage": 3, "nextPage": 5, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 10, "notes": "The slide uses a narrative of 'exposing' management's claims by contrasting them with external market data and government policy changes.", "elementsJson": [ "headline_text", "paragraph", "bullet_list", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b95-ffce19e398a1/4", "deckHref": "/decks/019dd923-622c-750b-8b95-ffce19e398a1", "deckJsonHref": "/decks/019dd923-622c-750b-8b95-ffce19e398a1.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b95-ffce19e398a1#slide-4", "components": [ { "bbox": null, "kind": "callout", "text": "Olam could scarcely have made a stronger case for its acquisition strategy being value destructive.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-0391-77f4-a9ea-6b2e22df8ef6", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.25, "w": 0.72, "x": 0.14, "y": 0.64 }, "kind": "list", "text": "Olam lauds itself on the “successful implementation of a turnaround plan” for CFM because its revenue grew 37.3% between FY2009 and FY2011. This is greatly misleading. CFM’s revenue increase was driven almost exclusively by rising wheat and flour prices, and the appreciation of the SGD. The sale price of flour in Nigeria increased approximately 30% between 2009 and 2011 (from NGN 4,000 to NGN 5,200 per 50 kg bag). These increases were driven by increases in the cost of inputs (i.e., wheat), and were not driven by demand. From December 2009 to June 2011, prices for US Hard Red Winter Wheat increased 58.2% from US$206.25 / MT to US$326.43. In addition, the SGD appreciated against the NGN 17.7% during this time. CFM’s net margin declined from 2.5% during the first six months Olam owned it (ending June 30, 2010) to 0.9% for", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "20b34773-08cd-4362-9ff1-dd3b8b67866f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.72, "x": 0.14, "y": 0.28 }, "kind": "list", "text": "Management has also emphasized that our analysis does not take into account the value of the synergies between Olam’s wheat sourcing operation and CFM. Such synergies are likely short-lived. The flour milling industry in Nigeria is undergoing a major change – one that will diminish any competitive advantages that Olam’s global procurement and logistics systems might be able to provide.", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "21cc70c3-4f01-4ef6-b4fe-f59d4fd6e4ef", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.72, "x": 0.14, "y": 0.18 }, "kind": "list", "text": "Olam stated that Crown Flour Mills is “one of the best performing acquisitions of Olam to date…” in response to our showing that CFM has been burning operating and free cash, and generated only a FY2011 PAT margin of only 0.9%.", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d9a32700-22bc-4631-b02f-5c40ed1aeef7", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "PAT margin: 0.9%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-0391-77f4-a9ea-72b2fec4e0e0", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.04, "w": 0.72, "x": 0.14, "y": 0.13 }, "kind": "paragraph", "text": "Olam has validated our off-the-rails acquisition and CapEx thesis in its response regarding the Crown Flour Mill acquisition.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "271c9bb8-b89a-44b1-ab36-c9d4217493b6", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.22, "w": 0.72, "x": 0.14, "y": 0.41 }, "kind": "paragraph", "text": "The Government of Nigeria (GON) is implementing an aggressive import substitution policy by forcing millers to use locally grown Casava. Other wheat flour substitutes are also being explored. This will commence in 2012 with a 10% cassava flour inclusion rate, and is expected to increase steadily to 40% by 2015. The government also plans to introduce fiscal incentives to stimulate increased domestic production and processing of cassava. Effective July 20, 2012 the import duty on wheat increased from 5% to 20%. The result is that production capacity at the mills is dropping, and according to a local Nigerian wheat expert, business projections of increasing growth and capacity expansions of the flour milling industry are “slowly being killed by [Government of Nigeria].”", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "3e23a5ae-0410-4030-9351-8bb50a50a792", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "slowly being killed by [Government of Nigeria]. — local Nigerian wheat expert", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-0391-77f4-a9ea-6e451387f1e7", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.72, "x": 0.14, "y": 0.89 }, "kind": "source-note", "text": "Footnotes 1-6 detailing Olam response pages and USDA data sources.", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "14fdaf00-3dac-428f-b5e8-baac0e4c4f06", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.5, "x": 0.14, "y": 0.09 }, "kind": "title", "text": "Crown Flour Mill – the High Water Mark (Man the Lifeboats!)", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "24747627-0543-44cb-a3eb-5492ff677263", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 7, "from": 4, "beatId": "16e3b2fa-ae7c-4ef5-b7f7-123f386c10a1", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "Expose Contradiction", "beatSlug": null, "evidence": "Slides 4-7 expose contradictions in Olam's financials and accounting practices.", "position": 0, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [ { "to": 5, "from": 4, "name": "Zoom In", "slug": "06-zoom-in", "bestFor": "Technical deep-dives, case studies, detailed analysis", "matchId": "e63301e3-2605-429f-963d-066fcd6fd908", "evidence": "Slides 4-5 zoom in on specific financial contradictions.", "position": 0, "objective": "What are the specific contradictions in Olam's financials?", "structure": "The Big Picture -> Key Area of Focus -> Specific Detail -> Implication", "confidence": 0.7, "description": "Start broad, then progressively focus on specific details that prove your point" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }