Olam's main problems worsened in Q2: Muddy Waters

Olam's numbers are ''dangerously high".

According to Muddy Waters analysis of Olam's Q2 2013 results, the firm retains its original investment thesis and Strong Sell rating on Olam’s shares.

The 4-page report claims that Olam’s main problems worsened in Q2. According to the report, the agribusiness mogul's free cash burn was S$169.6 million for the quarter, and its borrowings increased 5.6% QOQ to S$8,836.4 million.

Olam’s gross debt to LTM adjusted EBITDA is now 9.5x,2 compared to 9.3x at the end of Q1. Olam’s net debt to LTM adjusted EBITDA is now 8.4x, compared to 7.8x
at the end of Q1.

"These numbers are dangerously high," it said.

Here's a brief part of Muddy Waters' analysis:

While Olam generated positive operating cash flow in Q2 (for only the 13th time in the 32 quarters it has been public), interest expense was 69.9% of OCF.

With Olam’s bonds yielding approximately 7% to 8% (which we feel is too low), Olam’s interest burden is not sustainable.

On the positive side, Olam management stated that it does not expect its debt to increase in 2H 2013.

Hopefully for investors, this prediction will turn out to be more accurate than Mr. Verghese’s November 29, 2012 statement that Olam would not raise money through the markets for at least five months.

It announced a US$750 million bond financing four days after he spoke.

Olam’s YOY Q2 sales increase of 24.3% supports our conclusion that Olam’s core trading business is faltering.

Tonnage grew far faster than sales–71.9%. Further, Olam’s PAT excluding extraordinary gains decreased YOY 6.3%.

Note that in Q2 2013 Olam had the benefit of a full quarter of ownership of nine newly acquired companies, which makes the comparison that much more startling.