* Olam to review targets including free cash flow
* Business review to be completed in 3 months
* Terminates $240 mln investment in Brazil sugar miller
* Markets wary of acquisition spree and funding costs
* Raised $712.5 mln in January, backed by Temasek
By Eveline Danubrata and Anshuman Daga
SINGAPORE, Feb 7 (Reuters) - Singapore commodities firm Olam International Ltd, under attack by short-seller Muddy Waters LLC for its aggressive spending and high debt, has begun a review of its business priorities and free cash flow targets.
The review and the termination of a proposed $240 million investment in a sugar miller in Brazil are the first signs that Olam is breaking away from its debt-funded series of acquisitions over the past few years.
"The business review is sending a message to shareholders that they are trying to do something, but shareholders are likely to wait and see if they can execute," said Victor Lim, managing director of VL Asset Management Group, which holds Olam shares.
In November, Muddy Waters criticised Olam's accounting practices, high debt levels and investment projects, sending the company's bond and stock prices tumbling and spurring it to announce a bonds-with-warrants issue the following month to shore up its finances.
Olam managed to get full backing from powerful Singapore state investor Temasek Holdings Pte Ltd, its second-biggest shareholder, which raised its stake to 20 percent compared with about 16 percent before Muddy Waters took aim at the company.
The business review is expected to be completed within three months, Olam said at a results briefing on Thursday.
"Everything will be reviewed - our gearing, our cash flow target, our strategy," Chief Executive Officer Sunny Verghese told Reuters after Olam reported a 20 percent rise in second-quarter net profit.
Verghese, mandated by the Kewalram Chanrai Group to start Olam in 1989, spearheaded the company's expansion beyond trading, into the production and processing of agricultural commodities from cotton to coffee to cashew nuts.
Olam has borrowed heavily to advance its ambitions as it competes with larger rival Louis Dreyfus Corp and other commodity companies such as Noble Group Ltd and Wilmar International Ltd.
Its expansion drive has included a dairy business in Uruguay, almond plants in Australia and a greenfield urea project in Gabon.
Olam's debt and growth prospects were thrown into the spotlight when Muddy Waters rated it a "strong sell" in a harshly worded report, and several brokers have since cut their ratings and earnings forecasts.
Verghese, who had described the report's assertions that Olam was teetering on the brink of failure as "a bolt from the blue", is under pressure to cope with a spike in short-term funding costs and shaky investor confidence.
Verghese said on Thursday that the company had stabilised its situation, but concerns in the market linger.
"If there's another scare, they may need to do more firefighting," said Charles Spencer, an analyst at Morgan Stanley who has an equal weight rating on Olam's stock.
"Capex numbers won't stay as high. They said there are a few things they can do in addition to slowing down investments, such as lease-backs on their owned land and investments."
Olam said its net profit rose to S$154.1 million ($124 million) for the three months to Dec. 31, from S$128.5 million a year earlier.
While some analysts refrained from giving second-quarter profit forecasts due to the uncertainty stirred by the Muddy Waters allegations, two analysts had given estimates ranging from $105 million to $117 million.
Olam raised $712.5 million from its rights issue last month. If the warrants are converted to shares after three years, it could raise an additional $500 million.
Olam is still the most heavily borrowed stock in Singapore's main index, according to Markit Securities Finance, indicating that many investors still hold short positions in the stock aiming to benefit from a price fall.
Of Olam shares that are available for lending, 75.1 percent are out on loan, compared with an average of 11.6 percent for Singapore's benchmark index.
The shares had fallen as much as 22 percent after Muddy Waters' attack. By Thursday's close they had pared that decline to 6 percent, putting Olam's value at about $3.2 billion.