* 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 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
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 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
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.