Meltdown of Noble Group shares

Noble Group suffered another major setback when its shares experienced yet another bout of massive sell-offs, triggering the activation of SGX circuit breakers. Upon the commencement of trading on 12 May 2017, shareholders of Noble Group ran for their lives and dumped the shares like no tomorrow. The rout resulted in the activation of circuit breaker at 9:01 am.

However, the circuit breaker was futile in stopping the carnage. Share price continued to fall by as much as 22% compared to the day before. The sell-off came fast and furious, prompting another circuit breaker at 9:54am. At the rate of declining, Noble Group was set for an explosive free fall.

The crisis in confidence came about as the commodity trader issued a profit guidance of a loss of USD130 million loss for Q1FY17. This incurred the wrath of shareholders and ignited the meltdown of Noble Group shares.

The circuit breaker system was introduced by SGX only in 2014. Following the plunge in penny stocks of Blumont Group, Asiasons Capital and LionGold, SGX saw the need to introduce circuit breakers. According to SGX, “the circuit breaker is activated when an incoming order could potentially match an existing order in the order book at a price outside the circuit breaker price bands. The price bands comprise an upper and lower price limit based on a deviation of 10% from a reference price”.

When the circuit breaker is activated, a cooling off period of five minutes will take place. During the cooling off period, trading can still take place within the price bands of no more than 10% away from the reference price. With this system in place, the regulator hopes to reduce wild fluctuations in share price and safeguard investors’ interests.

The latest horror show of Noble Group occurred in a difficult time for the once-mighty commodity giant. Once a company with market capitalization of over $10 billion, Noble Group has fallen from grace due to a collapse in commodity price two years. It’s share price was also targeted by short sellers who were hell-bent on pulling down the shares after reports of questionable accounting practices. As the company was on fire, the ex-CEO was forced to quit and founder Richard Elman announced that he would step down within a year.

Read my previous articles on Noble Group:

1. Noble Group will swim or sink?
2. Is Noble Group doomed?
3. Will Noble Group do an Osim or Swiber?
4. White knight for Noble Group

In the midst of the chaos, Noble Group announced a rights issue to raise USD500 million. While it is very common for listed companies to ask shareholders for money, what riled investors was that the rights was offered at a steep discount of $0.11 per share. Many shareholders feared that the rights exercise could lead to huge value destruction for the share price. One year later, Noble Group shocked investors further by announcing a 10-into-1 shares consolidation. The company claimed that the move was aimed at reducing liquidity of shares trading but minority shareholders’ major fear was that the move would shrink their holding and facilitate a cut-throat takeover.

To be fair to the management, Noble Group did make effort in selling off substantial assets and trimmed headcount in a bid to save the company’s ailing financial performance. But what irked the shareholders was the unpredictability of the company’s direction. At some point during the recovery, reports of a new white knight emerged but subsequently the development fizzled out.  Issuing rights and then subsequently consolidating shares did not go down well with shareholders as well.

The latest Q1 loss also raised many questions over the management’s ability to turnaround the company’s fortune. For sure, the loss of USD130 million in one financial quarter was peanuts compared to the massive loss of USD1.67 billion it suffered in 2015, the company’s worst annual loss. But two years down the road, shareholders expect better showing from the management. It is simply not acceptable that after a slew of mitigating actions, the management still issue a report card full of red ink.

Clearly, shareholders had enough of Noble Group. Within two trading days, share price of Noble Group plunged by 50%, a classic case of falling knife. On 11 May 2017, the short selling volume for Noble Group stood at 18 million, with value worth of $18.6 million. This indicates that the big boys may be shorting this counter aggressively.

Investors who wish to make money with the whales may join in the selling frenzy but word of caution is that making money with the big boys is never easy. The best thing is to wait until the dust has settled before buying Noble Group shares.

The concern over Noble’s finances will continue to affect investor’s confidence. For the past two years, the commodity trader has been bestowed by woes after woes. Can Noble turn the table? To achieve this, the management may need to learn from its rival, Olam International.

Like Noble Group, Olam is also a commodity firm backed by sovereign wealth fund – Singapore’s Temasek Holding (Noble’s backer is China Investment Corp (CIC)). However, Olam is in the soft commodity, which is mainly in agri-business, while Noble core business is in hard commodity – coal and metal mining. Similar to Noble Group, Olam was also targeted by short sellers, US-based Muddy Waters, over alleged accounting misconduct.

However, the similarities ended there. For Olam, Temasek Holding was fully behind Olam and the state investment firm intervened through increasing stakes in Olam. The show of support also led to the emergence of a second major investor, Japan’s Mitsubishi Corp, a giant conglomerate with diversified businesses across the globe. In a further show of strength, Temasek single-handedly pull Olam out of the mud when nineteen banks lent USD 1 billion to Olam in 2015. With strong credit lines, Olam was able to survive and subsequently pull through the ordeal.

Henceforth, for Noble to emerge out of this scary relentless nightmares, the management must convince that they are worthy of rescue mission from their major shareholder – CIC, which had been paring down stakes in the firm for the past few years. Based on Olam’s story, the role of major investor with deep pocket would help to change the game and stave off persistence attacks from short sellers. Noble’s inability to attract another major investor could also impact investor’s confidence as questions would be raised over the long-term prospect of the company.

Is it game over for Noble Group? I honestly doubt so but I have a feeling that Noble’s adventure is coming to an end, at least in the Singapore chapter. Perhaps a surprise takeover by management may be on the cards and resulted in a delist from SGX. Or maybe the company would go down in flames?

One thing for sure is that this would be a sickening weekend for Noble’s shareholders. Reality checks and reflections for those suffering massive paper losses. Who knows? Perhaps Noble Group would announce a positive news over the weekend? With Noble Group, you never know. Stay tune and enjoy the ride.

Magically yours,

SG Wealth Builder