14 December 2012

My thought on Olam - 14 Dec 2012

Olam is a famous counter recent weeks due to the famous US Short Seller's comment on its aggressive accounting standard and management behavior. Why did it say so? It could be due to several reasons which I believe you all knew from report mentioned by him:

US GAAP vs IFRS. In IFRS, it is necessary to report the value gain from biological assets / non current assets and amortize it in later years if it would happen later. The so called "Unrealized Gain" will be recorded under the Income Statement and Equity Value will be increased in Balance Sheet.

My view is that, Olam is following IFRS standard, and part of the reasons of rising of the profit in recent quarters are also due to increase in biological assets. To me, this is a tricky part as management plays an important to justify an increase in biological assets.

As of now, it is still uncertain whether Olam still requires more Cash Flow from Financing (CFF) to support its working capital (CFO). As the Free Cash Flow (FCF = CFO - Net CAPEX) continues to be in negative amount so at least 5 consecutive years, this business model is not sustainable, unless the cash flow can turn to positive in near future.

It reminds me of Air Asia. Air Asia relied a lot of cash flow in initial stage, and its cash flow can only be positive FCF in later years after it had established a low cost carrier leadership in Asian region as well as in Asia Pacific region. The share price was not improving until the company started to generate positive FCF later.

So, to invest in such aggressive company, you have to have a very big risk appetite. And you have to have a strong confidence on the management to turnover a -ve FCF model to +ve FCF Model in long run. My thought is that, it can be part of your portfolio, if and only if you have done a thorough homework on it. It may not suitable to all the investors who require a stable / lower beta stock performance.

Source: Shareinvestor.com, Company

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