Is Noble Group doomed?

By now, investors of Noble Group must be feeling jaded. Investing in this SGX-listed commodities trader has been challenging with the wild swing in share prices in recent months. The roller coaster ride was a result of various key developments taking place within a short span of time. So, is Noble Group really doomed?

The past two years had been a scary nightmare for Noble Group as the group was initially criticized by research house, Iceberg Research, over its accounting practice. The negative report unexpectedly led to ferocious short-selling attacks and caused the share price to plunge to frightening new lows.

As the management fend off the relentless attacks, former CEO Yusuf Alireza resigned in May and Chairman Elman announced that he would step down within 12 months. To make things worse, Noble Group announced a record loss of USD 1.6 billion for 2015, its first loss in almost 20 years. Many investors feared the worst for Noble Group.

In my previous article, I wrote an analysis of Noble Group and determined an entry price of $0.12 which provided me a level in which I would feel comfortable to invest in. Honestly, in my point of view, it is unlikely that Noble Group will fold because of its long history of strong backing from China’s sovereign wealth fund, China Investment Corp (CIC). But the rights issue, coupled with the debt obligations, made me feel that Noble Group share price was grossly inflated. Despite this, many readers were cynical and rubbish the idea that Noble Group share price would ever revert to the $0.12 level.

Previously I have written several articles on this stock. Readers may want to check out the following posts:

1. Will Noble Group do an OSIM or Swiber?
2. White Knight for Noble Group
3. May Day for Noble Group!

Based on the full year results for 2016, the management made significant progress in bailing out the company. Profit for the year was USD 8.1 million, a huge reverse from the gigantic loss of USD 1.6 billion seen in 2015. Credit must go to the management for taking concrete swift actions to re-align the businesses of Noble Group. In 2016, the management sold several core and non-core assets to release capital and pared down debts.

In addition, Noble Group also raised funding through a $500 million rights issue, in which CIC supported and subscribed. There was strict cost discipline arising from headcount reduction from 1525 to 1050. Further headcount reductions are expected in 2017 in a bid to reduce costs.  Due to these proactive measures, net debt declined by a whopping USD 1.1 billion.

Amid the positive financial results, Noble Group surprised investors by announcing that it was in talks with a major investor over a possible strategic investment in Noble Group. The news led to a surge in Noble Group share price and trading volume. Many investors were bullish on Noble Group because they thought that it had achieved a remarkable turnaround. At one point, the counter was even trading at a high of $0.27. Those traders who adopted a buy and sell strategy in this counter would have made a tidy profit.

Notwithstanding the above, Noble Group could not seem to shake off the haunt of Iceberg Research which continued to criticize the commodity trader. The attack led to renewed plunge in Noble Group share price. To make things even worse, Noble Group shot itself in the foot by announcing a 10-into-1 shares consolidation exercise. This latest move by Noble Group was unwelcome by investors, and share price tumbled all the way to $0.15.

Just imagine this. The previous rights issue was effectively an exercise to ask money from the investors and in return, investors got more shares at discounted prices. For those who subscribed to the rights issue and subsequently took profits when the share price hit a high of $0.27, it was a smart move. For those investors who have not divested, the shares consolidation represented a lot of uncertainties. Thus, this explained the wrath of investors who still hold on to the shares.

The potential investment by a new major investor is also not binding and not confirmed. So technically, Noble Group is still not out of the woods yet. Many investors also struggled to put a value on the balance sheet. At the center of the firestorm was the fair value gains of the commodity and derivative financial instruments. A large chunk of the current assets was still classified as fair value gains of USD 3.78 billion. Nonetheless, this amount was significantly lower than the amount of USD 6.2 billion in 2015.

Investing in commodity business is always risky but if the company can manage cost effectively, the reward can be huge. Noble Group is at a cross-road and it is still premature to claim “light at the end of the tunnel”. But the company has made significant stride in raising capital, reducing debts and implementing cost reduction initiatives. The selling of assets to raise more capital will continue in 2017 and enhance the liquidity for the company. On this note, the restructuring will continue for Noble Group and it could be a little while more before things stabilized.

Noble Group could be an interesting investment for momentum play but there is a need to set an entry price. The key to making money from this stock is to buy the stock at the turning point, which is not easy. Investors must not be greedy as well and should take profits once exit price has been reached.

This counter, however, is a risky counter and it is not wise for investors to adopt a buy and hold approach. It is also not suitable for investors who are risk-averse and looking for long-term capital appreciation for their investments.

I am not vested in this counter but I continue to like this stock for its business model. Fundamentally, I still believe in the global demand for commodity and Asia as an emerging market will continue to play an important role. Hence, the potential of the company is still sound but as events unfold, it is important for investors to calibrate expectations.

Magically yours,

SG Wealth Builder