Muddy Waters' allegations against Olam not totally unjustified: CIMB

But here's few reasons to believe Olam will ride out the storm.

"Muddy Waters’ allegations against Olam are not altogether unjustified, but they are not new. Although there could be a short-term stock overhang pending the release of the former’s research report, we believe this could present bargain-hunting opportunities," said CIMB analyst Lee Wen Ching.

Here's more from Lee:

Muddy Waters’ allegations against Olam have raised questions about the validity of the latter’s business model. We have examined these allegations and found them not totally unjustified, though not new to the market either. High gearing is common among supply chain managers. But we exclude readily marketable inventories (cash-like in nature) to determine its adjusted net gearing. Criticism over the recognition of biological-asset gains is nothing new. Such gains are valued by independent industry experts and are in line with Singapore’s FRS reporting standards. On our part, we strip out such gains in determining core net profits.

We believe Olam will be able to ride out the storm. Muddy Waters’ track record is spotted with hits and misses. History suggests that bargain-hunting
opportunities exist when stocks plunge on the day Muddy Waters releases its reports. While we do not advocate building positions pending the release of its report on Olam, should Olam plunge when the report is published, we believe there could be bottom-fishing opportunities.

Our Trading Sell is premised on near-term uncertainties until this saga blows over. Further downside is possible if Muddy Waters’ upcoming report throws up new issues. We keep our EPS and target price for now, still based on 1x CY13 NAV. Olam is not an outright Underperform as we believe share price weakness is driven by a one-off event and temporary in nature.

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