Commodities trader Noble Group Limited was a proud blue chip stock in Singapore’s market until it was removed from the Straits Times Index in March 2016. Once Asia’s largest commodities trader, Noble Group has seen its stock price undergo a stunning collapse and is now trading at penny stock price level.
The company has been beleaguered since 2015 as the downturn in the commodities market coincided with the company’s alleged malpractices. Its shares plummeted more than 90 per cent since analysts led by Iceberg Research started highlighting how Noble was overstating its assets by billions of dollars, claims which Noble rejected.
Over the past 18 months, it has tried to pull itself out of a financial quagmire by raising almost US$3 billion through asset sales, and bond and share issues. But the fundraising efforts might not be enough for the distressed group.
It recorded a US$130 million net loss in the first quarter of 2017 because of wrong-way bets on coal prices and dwindling liquidity. Meanwhile, prices of its bonds have dropped to levels that suggest traders see a high risk of default.
However, the company’s shares rebounded earlier this week as banks agreed to extend its US$2 billion credit facility until October. In exchange, creditors have asked Noble to find a strategic investor.
As Noble Group fights for its life, many investors are wondering if the shares would ever see daylight again. Some are hopeful that the company could stage a comeback and there’s been stories of corporate turnarounds in Singapore, but we are not as optimistic. Here’s why:
- Tough market conditions
Dislocation in the coal markets during the quarter caused the decoupling of prices of key indices and other trading issues. While the group has announced that it has taken measures to rebalance its portfolio to mitigate against the continuation and repeat of such adverse events, the operating environment remains challenging as a whole.
For instance, Noble is a major participant in the global physical oil market and energy coal. While global demand for oil has improved as recent measures to rebalance the market come into play, a period of sluggishness is still expected in the market in the year ahead, according to the latest report by the International Energy Agency (IEA). The Institute for Energy Economics and Financial Analysis (IEEFA) also expects the US coal industry to decline even further in 2017.
Given its circumstances, any further bad news would surely drive the share price further to rock bottom and we won’t be surprised if they don’t come back up.
- Accounting irregularities
Iceberg Research accused Noble of exploiting the accounting treatment of its associates to “to avoid large impairments and fabricate profit”. The crux of its findings – detailed in a 17-page report – is that Noble had been reporting higher net profits than the sums it was generating from sales in the past five years.
While it “completely rejects” allegations that it exploits accounting practices to fabricate profits, the damage is done and the accusations have a nasty way of not disappearing as the share price continued to plunge.
This was the second time in three years that a Singapore-listed commodities company has come under fire from a research group. In late 2012 Olam, a seed-to-shelf group, came under fire over accounting practices and ballooning debt from a US-based short-seller called Muddy Waters.
But in Olam’s case, the knock to its share price proved brief. The company rejected the accusations, and conducted a capital raising exercise that helped elevate share prices.
- Messy leadership
Noble Group’s stock took another hit last week as news broke of a lawsuit filed by former CEO Yusuf Alireza against company founder and chairman emeritus Richard Elman over HK$450 million (S$79.2 million) in shares related to alleged contract breaches.
Alireza, who was appointed CEO in 2012 but abruptly left the company in May 2016, filed the suit with Hong Kong’s High Court, claiming that he’s owed stock in the embattled commodity trader.
It goes without saying that most investors realise it is important for a company to have a good management team. As Noble struggles to repair investor confidence after setbacks in the past two years, such news will no doubt deliver another blow to its already flailing reputation.
For investors, the outlook remains extremely hazy for this once mighty SGX listed company and need to calibrate expectations and decide for themselves whether to cut losses or continue to invest in the company.