SGX stock review 2017 – Noble Group

Due to a request from reader, I am consolidating a series of analysis for Noble Group in 2017. The links to the articles are below and they are unprotected for a limited time. Thereafter, they will be locked up and you need to register as member of SG Wealth Builder to access the premium content.

Do take note that this counter is very risky and novice investors should not attempt to trade it if there is a lack of understanding on the business model. This article is also only for information and not meant to induce or serve as a form of financial advice.

Noble Group

For Noble Group, 2017 will go down in its history as the most dramatic year as the commodity trader engaged in an epic swim-or sink-battle. From management upheaval, to lawsuits involving ex-CEOs, to plunging share price, vicious short-selling attacks, accusations of accounting malpractices, credit ratings downgrades, record earning losses and reported loss of bank support (DBS), Noble Group certainly looked on course to an explosive self-destruction path.

Despite the relentless troubles, Noble Group continued to attract institutional investors’ support. In June, Abu Dhabi’s Goldilocks emerged as surprise major shareholder while China sovereign wealth fund, CIC, remained one of its largest shareholders, with stake of 9.5%. With such strong support from China and Middle East, it is inconceivable that Noble Group will sink into default. But in the corporate world, never say never.

Readers should read the following articles to assess my insights on this ex-blue chip:

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

It seemed like an eternity when Noble Group was rated as one of the biggest blue chips in the Singapore stock market. However, that bragging right was stripped when it was booted out of the prestigious Strait Times Index (STI). In the good old days, Noble Group has no problem attracting lenders for access to financing because of its status as one of the largest commodity traders in the world.

Those days must seem surreal to investors of Noble Group as the company is now fighting for its life. On 21 December, Noble announced that it continues to be in discussions with its creditors and has obtained an extension on a waiver in relation to the financial covenants in its committed unsecured revolving credit facility to 18 May 2018 (being the maturity date of such facility).

As shared in my previous articles, the current crisis that Noble Group is facing is not untenable. To manage the crisis of confidence, it needs a shining white knight to restore confidence among the lenders. Although CIC and Goldilocks are considered institutional investors, they may not have the swaying power like Singapore’s Temasek Holdings.

A few years ago, fellow competitor Olam also went through similar crisis of confidence like Noble Group. Olam was attacked by Muddy Waters for its accounting practices in 2012 and the shares suffered from massive short-selling attacks. However, with the backing of Temasek Holdings, nineteen banks from around the globe lent USD1 billion to Olam, and the shares went on to achieve a three-year high in October this year.

Although Noble Group is raising cash through the monetization of key assets, such approach is not sustainable. The sale of the Global Oil Liquids and North American Gas and Power business units would help to reduce debts, but it also drastically reduces its business size. From $10 billion, the company should be valued at about $300 million. At the rate of the asset disposals, the value would likely to plummet even further.

In my humble opinion, the time has come for Noble Group to issue another round of rights issuance to raise more capital. Of course, many investors would object to this idea because in 2016, Noble Group has raised USD500 million rights. Another cash call in 2018 would not go down well with shareholders as there is no guarantee that the management would put the fund to good use. But at the moment, my view is that there are limited options on the table. This is because the downgrades in credit ratings would make it extremely difficult for Noble to secure fund on unsecured basis. For commodity trader, cash is critical for the trading operations.

I am not vested in this counter at all and thus, I try to be objective. Investors should do their diligence on whether to cut losses or stay vested. In any case, in view of the chaotic situation and shaky balance sheet, investors should adopt a wait-and-see approach before entering this counter.

2018 will be a water-shed year for Noble Group as its founder, Richard Elman, attempts to engineer a turnaround for the embattled company. If there is anyone who can save Noble Group now, it has to be Richard. After all, there are not many rag to riches stories in Singapore. Richard has built Noble Group from scratches into a multi-billion business in the span of 30 years. Thus, I am absolutely convinced that Richard has the ability to pull this off. Why is this so?

From the macroeconomic point of view, the demand for commodity will continue to rise in Asia Pacific because many of the countries are growing economies. This means that the need for hard commodity would continue to rise in the long run as countries in this region build their infrastructure. Based in Hong Kong, Noble Group is strategically placed because it is a gateway to China, a massive market.

As a middleman, Noble Group transports goods from producers to consumers. In short, Noble Group markets, processes, finances and transports key commodities, connecting low-cost producing regions with high-demand growth markets. Such business model is not easy to build unless the founder has good knowledge of the market and connections to lenders. Thus, the company do have its competitive advantages and business strengths. The key now is to manage the downside risks.

Will Noble Group rise from the ashes in 2018 or will it sink into the abyss? The time has come for Richard Elman to write the final chapter of his Noble adventure. One thing for sure is that it will be a roller-coaster ride for investors. Till then, enjoy the ride.

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