Noble Group will sink or swim?

Fresh from a 10-into-1 shares consolidation, Noble Group share price free fall by 33% at one point during the trading day of 11 May 2017. The sharp correction was due to the bombshell dropped by Noble Group announcing that it is likely to record a net loss of around USD 130 million for 1Q2017. Investors must be wondering if the embattled Noble Group will sink or swim after two years of roller coaster ride.

After reporting a profit of USD 8.6 million for FY16, the commodity trading company recently irked investors with the ill-timed shares consolidation. It was reported that massive number of investors stormed out of the special general meeting, even though the proposed consolidation move was eventually approved.

The shares consolidation raised a lot of controversies because it came in the midst of a respite from a horrendous USD 1.6 billion loss in 2015 and negative reports over its accounting practice. Amid the vicious short-selling attacks, the share price tumbled to record low of $0.12. Recent positive financial results and reports of major investor’s interest in Noble Group led to a brief recovery in share price. Nonetheless, Noble Group did itself no favor by announcing this shock shares consolidation exercise.

I am not vested in this counter but I can empathise with existing shareholders of Noble Group. First of all, there is no guarantee that after the shares consolidation, the share price of Noble Group will remain north of $1.00. Many SGX listed companies fell below the $1.00 mark after shares consolidation. K1 Ventures is one good example. K1 Ventures’ share price used to trade around $0.18 to $0.25 level. After the five into one shares consolidation, the share price dropped from $1.00 to $0.70.

Some investors may have thought that the shares consolidation exercise of Noble Group was to meet SGX Minimum Trading Price (MTP) requirement but then again, SGX has already revised the MTP to exclude companies with certain level of minimum market capitalization. Under the revised MTP, Noble Group is safe from being blacklisted. Thus, the move by Noble Group is not likely meant to address listing compliance.

A more ominous sign is that Noble Group is gearing for at least one more rights issue to raise capital. The latest profit guidance provides evidence that the struggling commodity trader is still not out of the woods yet.

Under normal circumstances, I do not like rights issue because it is like being held ransom by the company. Of course, you can choose not to subscribe to the rights issue but there is a risk that the share price is likely to drop after the rights issuance and the value of your investments will shrink. On the other hand, if you choose to subscribe, there is a need to pump in more cash but there is no promise that the company would put the additional funds to good use. At the end of day, you don’t know if you are throwing good money after bad.

The latest profit guidance would certainly rile investors as it came hot on the heel of the shares consolidation. Noble Group claimed that “The operating environment remained challenging for the Group in 1Q 2017; made worse by dislocation in the coal markets during the quarter causing the decoupling of the prices of key indices, liquidity dropping significantly and the breaking down of correlation”. Investors must be wondering what happened to the USD500 million raised from the rights issue and given the financial health of the company, would there be another round of rights issue?

To be fair, the management did carry out proactive actions to reduce debts and costs through selling of assets and headcount reduction. But nobody expects the storm to last so long and it may take further cash injections before Noble Group could recover from this crisis. Thus, this explains the potential need for another rights issue. But if investors put things into perspective, another rights issue may not be that bad as they are still given the opportunity to participate in Noble Group’s future growth.

The biggest fear for investors is that the shares consolidation is meant to shrink the minority shareholder’s holding with the aim of a potential delisting from SGX mainboard. Of course, this is purely my speculation but if Noble Group really do apply for an exit, then it is likely to offer a cut-throat price for takeover. Nonetheless, this scenario is quite low because the stock market still provides easy access for companies to raise capital. So, it is unlikely that Noble Group would go down this route although the disclosure requirements of a listed company could lead to a lot of undesired exposure to short seller attacks.

The latest news from Noble Group is really disappointing and create new dimension of uncertainty for investors. Not too long ago, investors still harbour hope of a remarkable turnaround but it seems that such optimism is premature. The jury is still out on whether the management can manage to pull off a turnaround. Furthermore, the founder and chairman, Richard Elman will be stepping down in a couple of months. It is unknown how his successor will navigate Noble Group through this storm.

Will Noble Group collapse in style? In my point of view, I honestly doubt so because of the strong backing from China’s sovereign wealth fund, the China Investment Corp (CIC). But then again, the CIC has been paring down its stake for the past years. Its stakes in Noble has been gradually reduced from 14.7% in 2010 to 9.6% in 2015. If the major shareholder is selling off stakes in a company, investors should be concerned as it signals a lack of confidence in the prospect of the company.

Prior to the shares consolidation, I have wanted to enter this counter at $0.12. Many readers scoffed at my entry price and claimed that my analysis was flawed. They were convinced that Noble Group share price would never, ever sink to that level. But now that the current trading price is at $0.08 at pre-consolidation level, I guess my concern was justified. With the impending change in leadership and company fighting a business turnaround, the risk is too much for me to invest in Noble Group.

Check out my previous articles on Noble Group:

1. Is Noble Group doomed?
2. Will Noble Group do an Osim or Swiber?
3. White knight for Noble Group
4. Mayday for Noble Group!

The outlook remains extremely hazy for this once mighty SGX listed company and catching the share price when it has bottomed out is extremely tricky. Investors need to thread this counter cautiously to avoid catching a falling knife. It is important to calibrate expectations and decide for yourself whether to cut loss or continue to invest in Noble Group.

Magically yours,

SG Wealth Builder