Shares of Oatly (OTLY), the maker of plant-based versions of dairy, sank on Wednesday following a critical report from an activist short seller raising concerns over the accuracy of financial statements of the company and the robustness of its environmental, social and governance practices (ESG).
In a new 124-page report, activist short seller Ben Axler, CIO and founder of Spruce Point Capital, says Oatly faces “an intermediate downside risk of 30-70% as he fails to meet the ambitious goals built into his valuation.” and longer-term insolvency risk “when investors realize that the dietary fad for oat milk has matured and interest in funding losing companies wanes. “
The Spruce Point Capital report also raises concerns that investors “are not focusing on the multiple weaknesses in accounting and financial control which we believe manifested in an overestimation of revenue and gross margin of 640. basis points ”.
“Our concerns are documented by interviews with former employees and glaring signs of projected CapEx inflation 77% above historical costs after Oatly had three auditors in six years. Investors should also be concerned that its CFO and audit chairman are both masking their roles in past accounting scandals. Oatly’s valuation has mysteriously increased nearly 6 times since a $ 200 million investment by Blackstone in July 2020 despite our evidence indicating a loss of market share. Oatly is trading at 17 times 21E sales and 75 times adjusted gross profit and a valuation of $ 12 billion (57% of the total non-dairy milk market projected to 2025), ”Axler wrote.
In Axler’s opinion, the valuation of the company is “unsustainable and will end badly for new investors”. The short seller also asked the board of directors to hire an independent forensic accountant to review its claims described in the report.
According to the report, Axler also challenges the company’s commitment to ESG practices, arguing that “Oatly does not practice what it preaches in terms of good environmental, social and governance practices.” Axler referred to a June 2021 investor presentation that said the company “picked” the results of a study “by failing to show that its impact on water consumption is worse than cow’s milk.”
“Thanks to a FOIA [Freedom of Information Act] request, we have learned that Oatly’s production process also generates hazardous volumes of wastewater that requires it to build its own treatment facilities and that the company is not in compliance with EPA regulations. in New Jersey. Oatly’s first study deals with the importance of transportation costs, which account for nearly a third of its environmental impact. Yet in Oatly’s quest for rapid business growth and his run for the IPO, we believe he recklessly ignored these costs by locating production facilities thousands of miles from his sources. of oats, and also sought to mask the impact of shipping costs in its financial statements, ”Axler wrote.
Elsewhere, Axler noted that channel checks showed signs of losing market share in Sweden and the United States. facilities. “
“As such, we believe Oatly will disappoint investors greatly and never achieve profitability,” added Axler.
The Swedish oat milk company, which debuted on the stock market in May, has seen its share price fall by almost 5%. The stock, which hit an all-time high of $ 28.73 in early June, is down nearly 11% since its IPO.
In a statement on Wednesday afternoon, Oatly said he was “aware that a short seller is making false and misleading statements about the company. This short seller should benefit financially from a drop in the price of the company. Oatly’s action caused by these false reports. Oatly rejects all such misrepresentation by the short seller and stands behind all financial activity and reporting. ”
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.