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Nightmare of Noble Group continues

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Can Noble Group turn the tide and weather the storm? The embattled commodity trader is currently fighting for its life as it faces an epic swim-or-sink battle. The latest financial results revealed that the nightmare, which started two years ago, is set to continue.

Once the brightest star in the Singapore stock market, Noble Group market capitalization was worth a mighty $10 billion. In its heyday, Noble Group reigned supremacy and was even regarded as the world’s top commodity trader, alongside rival Glencore. For Singapore Exchange (SGX), it was indeed an honour for Noble Group to be listed in Singapore, even though it is a Hong Kong-based company.

The nightmare

Those good old days must be dreamy for investors now as its market capitalization has shrank to an alarming $460 million. The rot started two years ago when an unknown financial blogger, Iceberg Research, accused Noble Group of accounting malpractices. That astonishing allegation led to a series of vicious short-selling attacks and precipitated the start of the downfall of Noble Group.

Noble Group

Prior to the release of the latest quarterly results, management has pre-empted investors that it is set to register a devastating loss of USD 1.8 billion. So, investors shouldn’t be shell-shocked by the massive losses. Nonetheless, it is incredible that Noble Group is still able to continue operating as a business. Not many companies in the world are able to sustain such colossal losses without filing for bankruptcy. On this note, its mere survival is already considered a major feat.

In the report, it was revealed that the total net losses of USD1.9 billion stemmed from two causes – trading losses in the Oil Liquids business and the significant non-cash valuation adjustments of USD 1.3 billion to the Group’s net fair value gains on commodity contracts and derivative instruments. The non-cash valuation adjustment was one of the key measures to be implemented arising from the recent strategic review to revive the fortune of Noble Group.

Attack of the Iceberg

Of course, long-time nemesis, Iceberg Research wasted no time in claiming victory over Noble Group. The whole saga has been centred on the commodity trader’s aggressive accounting method and the announcement by Noble Group to adopt a more conservative valuation of its commodity contracts might seem to vindicate some of Iceberg’s claims on the surface. But then again, it should be noted that when it comes to accounting, there are always grey areas.

I am not an accountant by training but if PwC has verified that Noble Group followed international accounting standards, then there should not be any wrongdoings. Iceberg Research even took a pot-shot at Singapore Exchange (SGX) and Monetary Authority of Singapore (MAS) for the lack of regulatory actions against Noble Group. But such accusations sound hollow as who would choose to believe – an anonymous blogger or qualified auditor firm?

And it is reasonable to expect the authorities to take legal actions based on an unidentified source? Bear in mind that any actions would have serious consequences on the stock price and long-term branding of the company.

I am not trying to side with the Singapore authorities or Noble Group. Neither am I bashing Iceberg Research for making frivolous accusations. But fundamentally, I don’t agree that more regulations or enforcement actions would help to address potential fraudulent activities in the stock market.

Ultimately, investors must be educated on the concept of risk management and take responsibility for their own investment decisions. At the end of the day, when you lose money in the stock market, it is not fair to blame the regulators for failing in their oversight. After all, when you made money from stocks, it is not as if you would go congratulate the authorities for doing an excellent job.

Actually, nobody cares who is right or wrong in this whole saga. In the stock market, it only matters whether you make or lose money. Warren Buffett’s Number 1 investing rule is never to lose money. Rule number 2 is never forget Rule number 1. Of course, this is not to encourage you to invest in Noble Group. In fact, this is a punter stock and is considered a very high risk stock to invest in. So, it may be prudent to avoid or adopt a wait-and-see approach for this counter until the uncertainties has been addressed.

A lost cause?

A look at the balance sheet revealed that Noble Group is not a lost cause after all. Current assets amounted to USD6.96 billion, with the fair value of the commodity and other derivative instruments at USD2 billion, down from USD3.78 billion year-on-year. On the other hand, current liabilities amounted to USD5.2 billion. As the current assets exceeded the current liabilities, the situation is not that critical for Noble Group yet.

Notably, due to the asset sales implemented as part of the strategic review, the bank debts had been drastically reduced from USD1.19 billion to USD48 million. In my opinion, credit should be given to management for biting the bullet. The sale of key assets like Noble Americas Gas & Power Corp and the Global Oil business did help to reduce the debts significantly.

Nonetheless, it is still premature to assume that Noble Group is out of the woods. The cash flow statement revealed that that was a whopping net cash outflow of USD800 million in the first half of the financial year. This means that Noble Group is still burning big amount of cash at the moment. With only cash and cash equivalent of only USD635 million, there could be liquidity crunch in the coming months if Noble Group continued to burn cash at the current rate. It is no wonder that the creditors gave the company a deadline of only 120 days to buck up in June.

Is there value?

After a slew of asset sales, investors must be wondering if there is any value left in the beleaguered commodity trader. Strangely, many global institutional players are still keen to invest in Noble Group after all the troubles. China Investment Corp (CIC) remained as a loyal major shareholder, while Middle East investment group, Goldilocks Investment Company became another major shareholder in June after buying huge stakes from the market. It’s recent alliance with Mercuria is also a sign of huge endorsement in the quality of assets.

Recently, Noble Group even got the audacity to reject a takeover offer from Centricus, a London-based fund with links to Japan and Middle East investors. In this regard, I have much respect for the founder, Richard Elman, for putting up a good fight.

The reason why global big boys are still attracted to Noble Group is because many are still convinced of Asia’s growth in the long run. The commodity trader is strategically based in Hong Kong, the gateway to China. Noble Group is unique because it is not a commodity producer. The company sources raw material and then processes and transports the goods to high growth demand countries in Asia and Middle East.

Although the long-term potential is there, my concern is that Noble Group could be left with bare bones with the asset disposal programme. Hence, of priority now is to seek a white knight with pocket deep enough to plug the gaping hole in its finances. A few years ago, Singapore’s Temasek Holdings single-handedly rescued Olam from similar situation. Hopefully, Noble Group will get to see that day. Till then, enjoy the ride.

Read my articles on Noble Group:

  1. Noble Group’s horror show
  2. Noble Group new white knight?
  3. Will Noble Group shares see daylight again?
  4. Collapse of Noble Group share price
  5. Meltdown of Noble Group shares
  6. Noble Group will sink or swim?
  7. Is Noble Group doomed?
  8. Will Noble Group do an Osim or Swiber?
  9. White Knight for Noble Group
  10. Mayday for Noble Group!

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1 Comment

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  1. Goldman Sachs smells blood
    Smarter traders are circling around, and Noble employees shop for new jobs.
    Goldilocks investments, clumsy move indeed….
    It didnt do their homeworks well and in depth enough on

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