{ "docId": "019dd923-622c-750b-8b96-063645a867ac", "docSlug": "ad39e81239e4", "documentTitle": "Olam International Ltd. (SGX:O32)", "authorId": "51_Muddy_Waters", "authorName": "Carson Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2012-11-27 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 13, "pageCount": 133, "prevPage": 12, "nextPage": 14, "slideType": "research-note", "function": "diagnose_problem", "density": "overcrowded", "nDataPoints": 1, "notes": "The text discusses specific acquisitions (SK Foods, tt Timber, NZFSU) and critiques the booking of negative goodwill and re-measurement gains.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-063645a867ac/13", "deckHref": "/decks/019dd923-622c-750b-8b96-063645a867ac", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-063645a867ac.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-063645a867ac#slide-13", "components": [ { "bbox": null, "kind": "callout", "text": "We do not believe that Olam is really that savvy of a shopper, and we also believe that most of Olam’s NCAG acquisitions are poor investments.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-25b3-7229-bef7-f3b7d4c75758", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "reported PAT: 26.1%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-25b3-7229-bef7-fa82e28b31d7", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.72, "x": 0.14, "y": 0.56 }, "kind": "paragraph", "text": "Yet, Olam claims to capture negative goodwill on a fairly regular basis. Olam's gain on remeasurement of investment upon business combination of NZFSU is defensible from the perspective that the valuations were not subjective – Olam paid higher prices to acquire more NZFSU equity. Our argument with the gain though is that it seems perverse to book a profit on an investment when you appear to have thrown more good money after bad, just at a higher price. Further, the increasing price for NZFSU's shares might have reflected Olam's support for the company and the possibility of a buyout.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "10599168-7c50-4641-83d2-bfc36bbc6628", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.72, "x": 0.14, "y": 0.4 }, "kind": "paragraph", "text": "We believe that the significant NCAGs Olam booked following the acquisitions of SK Foods (negative goodwill), tt Timber (negative goodwill), and NZFSU (gain on remeasurement of investment upon business combination) are largely – if not completely – unjustified. Because Olam's NCAGs on these assets (with the exception of NZFSU) were based on Olam's revaluations, it means that the sellers were carrying, and / or sold, the assets below fair value. Negative goodwill from revaluation is generally rare in acquisitions because it means that the seller has decided to part with it for less than fair value (not to say anything about the expected value of future earnings).", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "1319279b-6fce-41b9-8eb9-52eb1703c572", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.72, "x": 0.14, "y": 0.09 }, "kind": "paragraph", "text": "Companies reporting significant NCAG are strongly incentivized to continue expanding their balance sheet in search of more assets on which they can book NCAG. Because companies want to grow earnings, the transactions that generate NCAG generally get bigger and require more and more cash. Enron employees joked that they were encouraged to spend $10 in order to generate $5 in current earnings. Olam has been explicit and aggressive about trying to grow reported earnings.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "7d291790-99ab-4966-b18d-14e17d7587cc", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.72, "x": 0.14, "y": 0.72 }, "kind": "paragraph", "text": "We do not believe that Olam is really that savvy of a shopper, and we also believe that most of Olam's NCAG acquisitions are poor investments. Olam appears to be hemorrhaging money on NZFSU and facing serious problems at Olam Tomato Processors (SK Foods), while tt Timber appears to have gone nowhere. Negative goodwill and re-measurement gains from these and other transactions (including biological gains) that occurred during FY2010 and FY2011 represented 26.1% of Olam's reported PAT during those periods.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d8b42adf-82b3-45f7-8736-6c4d6deb5f08", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.72, "x": 0.14, "y": 0.24 }, "kind": "paragraph", "text": "As we show next, the possibility that Olam will focus on buying NCAGs is a real danger for Olam's investors. While the cash Olam spends and debt Olam assumes are real, we believe that its NCAGs are misleading accounting line items that can fool investors into believing the company is more profitable than it really is. Further, the acquisitions and expansion that drive the NCAGs have put Olam in a precarious position regarding leverage. If the pattern of acquiring assets for questionable NCAG continues, Olam investors may have a significant risk of default.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "fae6961a-a5b0-41c3-9586-92c21d2701e1", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "Enron employees joked that they were encouraged to spend $10 in order to generate $5 in current earnings. — MW discussion with a leading journalist who previously covered Enron.", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-25b3-7229-bef7-f4280c9b19ab", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.45, "x": 0.14, "y": 0.88 }, "kind": "source-note", "text": "23 MW discussion with a leading journalist who previously covered Enron.\n24 Ignoring tax impact on those gains", "attrs": { "numbered": true }, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "3a3f2b34-c2c7-46e3-8557-7c9102f8cb2e", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 50, "from": 11, "beatId": "bbf191d5-c2cd-433e-9eaf-b22bfec7e6b2", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Struggle", "beatSlug": "overcoming-monster-the-struggle", "evidence": "Detailed critique of Olam's accounting practices", "position": 1, "confidence": 0.8, "parentBeatName": "Development", "parentBeatSlug": "development" } ], "loops": [ { "to": 20, "from": 10, "name": "The Reveal", "slug": "05-the-reveal", "bestFor": "Product launches, strategic pivots, unexpected findings", "matchId": "1c7944d6-7b78-442f-b56d-e49c84e46309", "evidence": "Detailed analysis of Olam's financial statements", "position": 0, "objective": "Reveal Olam's accounting irregularities", "structure": "Setup the Question -> Build Suspense -> The Big Reveal", "confidence": 0.7, "description": "Build mystery and anticipation, then deliver a surprising or powerful conclusion" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }