Less than Noble? Noble's Collision with Iceberg

noble group stocks Mar 05, 2018

by: Tam Ging Wien

All examples and stocks quoted here in this article and on the ProButterflyTM site are for learning purposes; it does NOT constitute financial advice or a Buy/Sell recommendation. Contents are reflective of personal views and readers are responsible for their own investments and are advised to perform their own independent due diligence and take into account their own financial situation. If in any doubt about the investment action you should take, you should consult a professional certified financial adviser.

Just last week, commodity trader Noble Group Ltd announced its full year results for FY2017 and shocked the market with as US$4.9b loss. The following news report from Channel News Asia provided a good summary of the Noble's recent results announcement: Noble Group plunges to US$4.9b loss, in talks to wrap up debt deal.

Again this week, news broke that Noble had paid its outgoing co-CEO Jeff Frase a remuneration package of approximately US$20 million last year. This is again summarised nicely in the Business Times article: Noble Group paid co-CEO US$20m as company lost billions.

As a result, its share price has suffered this year halving from a high of 30c on 25-Jan-2018 to close 05-Mar-2018 at 15c.

Less Than Noble?

Was its actions justified to pay such a huge remuneration to its co-CEO while its shareholder's suffered? The press seems to be all over Noble Group - painting a less than noble picture of the commodities trader.

The commodities trader is still currently in talks with its stakeholders to come to an agreement on restructuring of its debt.

The worse is certainly not over for the embattled commodity trader. Once a darling of the stock markets, its stock price was hit by an anonymous analyst known as Iceberg Research more than 2 years ago. Concerns surrounding Noble's ability to fulfill its debt obligations and accusations of inflating its assets and contract values have hit the stock hard.

In mid-March 2017, Noble had appointed Paul Jeremy Brough as Chairman of the board. Brough is a veteran in restructuring. Involved in many high profile corporate collapses, his counts the liquidating Lehman Brothers's assets in Asia, turning around the bankruptcy of Sino-Forest and restructuring failed fishmeal supplier China Fishery Group. Will this man be able to turn-around Noble in the years to come?

We will certainly be watching.

Collision with an Iceberg

In August last year, Iceberg Research released yet another scathing attack on Noble and pointed a finger at the failure of the Singapore regulators. Iceberg Research is an anonymous research house that has been attacking Noble since Feb-2015 when it first accused Noble of being a repeat of the Enron saga.

If you haven't had the chance to catch Iceberg's report, please click on the link below:-

Since then, Iceberg has released 2 more reports - one warning Noble's creditors of the poor management and the second attacking the restructuring plan. The key message that Iceberg seems to be delivering through these 2 additional letters is to point out that the same incompetent management remains at the helm of Noble will not change its fate regardless of the restructuring plan. We quote from the Iceberg's open letter to Noble's creditors: "you have been royally screwed".

The Sinking Titanic

We believe that the investing community as a whole as much to learn from the Noble saga. Drawing upon the lessons from this crisis will certainly help us as investors to always be on a look out for risk.

We have been following Iceberg Research since its first report in Feb-2015 and we found their analysis very insightful. Their reports have exposed many tricks used by Noble in order to inflate the values of their assets on their balance sheet.

While the reports are indeed heavy reading, we do encourage season investors to read them is helps you become aware of complex accounting slight-of-hand. We compile the links to the major reports by Iceberg below:-

However we understand that some of our readers may not have the in-depth accounting, analysis and investment knowledge to decipher Iceberg's reports which could come across as fairly technical in nature.

Therefore, here is a short summary of each of the 4 reports which we hope will help the larger investing community out there to appreciate the contents of these highly insightful reports:

  • Report 1: Noble inflated the values of its assets by taking advantage of accounting treatment of associates avoided impairing them and clocking losses. For example, the value of Yancoal on Noble's books was $678m in the 2013 annual report Noble's however the 13% stake in ASX-listed Yancoal only had a market value of only $11m. The more than $600m difference is due to the way Noble values its associates. With only a 13% stake, Yancoal should have been classified as "Financial Asset" which will be valued based on its market value. Assets are usually classified as "Associates" if the parent has a stake of between 20% to below 50%. By classifying Yancoal as an "Associate", Noble is able to avoid classifying it at market value.
  • Report 2: Noble took advantage of Mark-to-Market practices in order to increase the fair values of its unrealised commodities contracts. These contracts surged
    from near zero in 2009 to an unprecedented net $3.8bil in 2015. With inflated values, it used inventory repurchase (repos) contracts with banks to make short term borrowing to generate cash flow. Repos allow Noble to pledge these inflated valued contracts and inventories to banks for short term loans to tide it through the accounting period.
  • Report 3: Noble had poor corporate governance practices. For example, some of its independent directors have been on the board for 19 years and Iceberg questions if they are truly independent. Noble has also misrepresented its debt by omitting the corporate guarantee to associate Noble Agri against which new debt was raised. It also inflated its cash positions using repos to give appearance of higher amounts of cash.
  • Report 4: This report discussing how Noble has lost its credibility through poor investor relations such as avoiding questions about its finances, covering up by stating that the information is top secret, poorly constructed rebuttals and threatening to sue critics.

With regards to Noble, ProButterfly is presently staying out and observing the story unfold on the sidelines.

We hope you appreciate this education piece from ProButterflyTM.

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