Here's how bad Muddy Water’s allegations will hurt Olam

Selling pressures are underway for the stock.

Short-selling firm, Muddy Waters, has claimed Olam as its latest victim. Founder Carson Block has been reported to be betting against Olam’s shares as he questions the group’s accounting methods.

He has accused Olam of: 1) booking profits on transactions before it is clear how the deals will work out; 2) heavy indebtedness; and 3) aggression in how it reports biological gains on investments.

These comments were made during the Ira Sohn conference in London yesterday. The report has yet to be published.

CIMB thinks that the stock could come under selling pressure regardless of the verity of the allegations.

"Olam previously came under fire for purported “dubious” accounting. It had vehemently defended itself and quashed all such allegations. Its stock price, however, did not escape de-rating. We note that Muddy Waters’ concerns 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," said CIMB analyst Lee Wen Ching.