Noble Group – 5 Signs for a Turnaround

Noble Group 1-Year Chart 2016A year ago we have already commented on the battered Noble Group Ltd (N21.SI) in our blog post: Noble Group – Commodities aren’t Sexy at the Moment. Noble Group, which is named after the famous Hong Kong novel by James Clavell, was once a shining star and Asia’s biggest commodities house by revenue. 

Since February 2015 the company is defending its reputation after being criticized for its accounting practices. Although in line with international accounting standards, Noble Group came under pressure from analysts, media and short sellers who accused the company of overstating values in stakes of other companies and in long-term commodity contracts. A negative press, a credit rating downgraded to junk, and slumping commodity prices have scared investors away and have made the company vulnerability to short selling attacks. Since 2011 Noble Group has lost more than 90% of its market value. For 2015 the company reported its first yearly loss in almost two decades of 1.7bn USD as a result of write-downs of 1.9bn USD.

Noble Group is downsizing its business and trying to raise new capital where possible while seeking a strategic investor. A big challenge lies still ahead when it comes to refinancing around 2.2bn USD in credit lines which are due within one year.

During the first half of this year, Nobel Group reported revenues of 23.1bn USD an EBIT of 122m USD, a decrease of 30% and 71% respectively compared to the same period a year ago. Noble Group’s cash and cash equivalents have shrunk from 1.9bn USD in 2015 to 1.1bn USD in the first half of this year while net debt only slightly decreased from 4bn USD to 3.9bn USD during that same period.

Noble Group is still under strong attack of negative media reports. But a first progress of its restructuring efforts is visible. Rising commodity prices and the commitment of strong partners such as CIC will bring the company back on its feet. From its low at 0.11 USD in early September Noble Group’s shares are up 38%. The majority of covering analysts recommends holding the stock. Nevertheless, the company could surprise with a turnaround story. We have listed five reasons why:

  1. Richard Elman is a full-blooded entrepreneur who founded Noble Group 30 years ago with 100K USD capital. Mr. Elman made his way from a teenage scrap-metal laborer in the UK to the chairman of an Asian blue chip who made at its peak more than 94bn USD in revenues by trading commodities. His company was at some point among the top 100 companies in the world in terms of revenues and was a highly regarded member of the Singapore Stock Exchange. Mr. Elman is described as an energetic leader who is strongly determined to leave a presentable life work behind before stepping down as Chairman in 2017, though he is expected to remain on the board with a significant shareholding of more than 10%. With his newly appointed Co-CEOs Jeff Frase and William Randall, Mr. Elman has two hardcore business guys on his side who are highly experienced in Noble Group’s most profitable oil and coal businesses.
  2. Noble Group is currently in search for a strategic partner. This could help the company to return faster into the profit zone and bring back investor’s confidence. According to Mr. Elman, the decision will not be made in a rush. It has to be at the right time with the right candidate. We expect that this will happen before Mr. Elman will step down as chairman in June 2017.
  3. The long-standing ties with Chinese state-owned entities will be to a certain extent a guarantor to attract new capital. China Investment Corp (CIC), China’s sovereign wealth fund is one of Noble Group’s largest shareholders who took its full allocation of shares when the company raised 500m USD emergency rights in June this year. CIC got a second seat on the board in return.
  4. Noble Group’s restructuring plans are on track. Small improvements are visible in the Q2 report. In an effort to restore business value and to improve liquidity the company is on the way to raise 2bn USD, including the 500m USD from the rights issue, by cutting jobs, reducing overheads, selling shares and assets in low-margin areas and holding back cash from parts of its businesses. Noble Group could surprise on the positive side by the end of this year already.
  5. Commodity prices are slowly moving up again from their lows early this year. Worldwide demand for many commodities classes is rising. This will boost Noble Group’s revenues and also help improve its trading margins.

AIS Rating: ★★★☆☆

 

 2011  2012  2013  2014  2015  2016
H1 only
 EPS (USDcents) 6.2 6.9 3.4 1.6 -26.2 -0.41
 Change -38%  11% -51% -53% -1756% -117%
 P/E  P/E
SECTOR
 P/B  P/CF  Equity
Ratio*
 ROE  Debt/
Equity**
 Div
YLD
21 0.3 23% -44% 328% 4.8%

* Equity / Total Assets, ** Total Liabilities / Equity

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