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White Knight for Noble Group

As 2016 comes to an end, it is timely to review the significant developments of some of the popular stocks listed in Singapore stock exchange (SGX). Beleaguered Noble Group certainly is in the hit list as it made the headline news for all the wrong reasons. Is the company really doomed or would there be a White Knight for Noble Group?

The free fall of Noble Group’ share price represents one of the most dramatic declines in modern-day equity market. Listed in Singapore stock exchange back in 1997 and backed by China’s sovereign wealth fund, China Investment Corp (CIC), the commodity trading company used to be one of the revered stocks in SGX. Make no mistake, at one point, it was even trading at a record high of $2.40 per share back in 2004. Now languishing at $0.16, those giddy days must seem so surreal to long-term investors of Noble Group.

In fact, Noble Group was still in the elite Straits Times Index (STI) earlier this year but got booted out of the list in March 2016. Then again, being included in the prestigious STI should be the least priority for the management at this moment because there are more pressing problems to deal with.

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The fall from grace was not unexpected as Noble Group’s profits had been decreasing for the past few years. In 2012, profits was at a respectable level of USD 464.8 million but the amount decreased consistently to USD 132.5 million in 2014.

The horror show for Noble Group really started in 2015 when the company clocked in an explosive full-year losses of USD 1.67 billion due to collapse in commodity prices caused by China’s slow down. Not many companies can afford this kind of losses and it remains to be seen whether Noble Group can survive the onslaught of this down cycle.

In early 2015, somehow it got into an extraordinary war of words with Iceberg Research over its accounting practices and was also targeted by Muddy Waters. Arising from the negative reports and purportedly short-selling attacks, the share price plunged to penny-stock level in 2016. Investors of Noble Group who bought at $2.00 level have every reason to be angry because many of them are holding on to massive paper losses. Some investors might have burned their fingers in trying to dollar-average their investments in this counter but found it futile in fighting the fierce drop in the share price.

But the nightmare for Noble Group investors did not just end there. The share price came under huge pressure when ex-CEO Yusuf Alireza announced his shock resignation in May 2016. Further shock awaited investors when founder and chairman declared that he would throw in the towel as well by announcing that he would step down within the next 12 months. The double whammy sent Noble Group share price tumbling to 13 years low, triggering a trading frenzy in SGX.

When you have top management resigning at a time when the company is facing troubles, you know it is not going to send a good signal to the market. For Noble Group, there certainly was a crisis of confidence among investors because while it is common for CEO to resign, it is not normal for the Chairman to step down at the same time. Naturally, investors are entitled to be concerned over the changes in leadership styles and strategies.

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At the same time, Noble Group’ share price sank to new low when the company announced rights issue at $0.11 per share, a steep discount of 63% at then trading price of $0.30. That move was to raise about USD500 million to strengthen the balance sheet but it really hurt investors’ confidence because it came at a turbulent time for the company.

It is still premature to judge whether the new management can pull off a remarkable turnaround but Noble Group is certainly putting up a good fight in reducing debts. In adopting an “asset-light” approach, the troubled company has started to sell some its low return assets like the Watt Power subsidiaries and Noble Americas Energy Solutions (NES), of which it sold for USD1.5 billion.

The move to sell NES is a significant step because the net proceeds of USD 1 billion helped to reduce the net debt to capital from 53.7% to 39.9%. Apart from fulfilling their pledge to raise capital of USD 2 billion, Noble Group has made progress in restructuring its business and expects to achieve cost reduction targets by first half of 2017.

Nonetheless, the 3Q2016 financial results revealed that Noble Group is still not out of the woods yet. Net loss for the first nine months amounted to USD 42.8 million, as compared to net profit of USD 195 million last year. Revenue dropped from USD 50 billion in 2015 to USD 34.5 billion. But the key data to watch out is really the net cash flow from operating activities, which stood at negative $648 million. The negative working capital means that Noble Group is still bleeding cash from its operations. Short term bank loans continued to weigh on Noble Group, amounting to $2.25 billion. Given that US Federal Reserves is expected to raise interest rates at least three times next year, there is a need for Noble Group to expedite its debt reduction commitment to address the impending bank interest rate hikes.

Is Noble Group really a doomsday stock? On the surface it may seem like so but investors should be mindful of similar fate suffered by rival commodity player, Olam, back in 2012. Olam was also targeted by Muddy Waters back then but managed to survive the crisis with Temasek Holdings, Singapore sovereign wealth fund, emerging as the white knight.

The difference in Noble Group case is that it already has a white knight in CIC, China’s sovereign wealth fund.  Being a major shareholder of Noble Group since 2009, it holds 9.6% of the company shares. Other notable institutional investors included Orbis, Franklin Templeton and Prudential Holdings. With such support, it is hard to imagine Noble Group going bankrupt.

I am not vested in Noble Group nor have I trade this stock before but at current trading price of $0.17, it is certainly very tempting to enter this counter. It has been a difficult year for the commodity trading company but I am convinced that the company would emerge from this nightmare stronger and leaner. I will put aside some funds in this counter and enter at $0.12.

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SG Wealth Builder

SG Wealth Builder

SG Wealth Builder

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Updated: January 2, 2017 — 2:48 pm

4 Comments

Add a Comment
  1. Hi sgwealthbuilder,

    I have been following Noble for some time, it is my personal opinion that noble will not go back to 0.12. If you have been following Iceberg’s accusation, they like to pinpoint on Yancoal’s market valuation and that Noble is over inflating their assets (it is indeed true at that point in time). However, if you look at Yancoal’s market price now, it is 500% higher than start of the year.

    Besides, commodity prices are bullish now. Hopefully profit will show soon and it will return to a normal valuation.

    Best,
    http://www.aniontrading.com

  2. Hi AnionTrading,

    Thank you for pointing out. I may have overlooked the part on Yancoal. Will review this and write another analysis on it.
    Appreciate the research! Join me in my wealth journey!

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  3. CIC has been reducing their stake in Noble for past few years.
    Temasek has around 14% stake in Olam before the muddy waters saga.

  4. Hi Blancfable,

    Thank you for pointing this out!
    I totally overlooked it. Will write further analysis on Noble Group.
    I think this is getting real interesting!

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

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