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Noble Share Price Falls 8% After Short Attack
Corporate Digest | 17 February 2015
By: Tan Jia Hui
Articles (82) Profile

Share price of Noble Group, a global supply chain manager of agricultural and energy products as well as other commodities, tumbled 8.3 percent on 16 February, after a short report by Iceberg Research dated 15 February surfaced.

According to the report, the group has exploited various accounting loopholes, in particular, one which allowed it to list companies which it has a less than 20 percent interest in as its associate, rather than a long term or equities investment.

To begin explaining matters, the following is the definition of associates according to the international accounting standards:

“An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.”

As a rule of thumb, significant influence is usually acquired by purchasing more than 20 percent of voting power but less than 50 percent.

In the case of Noble though, it seems that management has claimed “significant influence” on several companies including Yancoal (Australia-based company listed on the Australian Securities Exchange) and PT Atlas (Indonesia-based coal company) as a justification for classification under associates despite having less than 20 percent stake in each of these firms.

So how does listing firms as associates affect Noble?

The main differences arise on the group’s balance sheet.

Measuring At Fair Value Or Cost
To illustrate, let us zoom in on Yancoal as an example.

By listing Yancoal (13.2 percent interest) as an associate, Noble is able to record its carrying value at cost, based on an estimation of its initial value and adjusting for profits and losses subsequently. Based on the group’s 2013 annual report, the carrying value of Noble’s stake in Yancoal is US$677.6 million.

However, if Yancoal was instead listed as a long term investment, based on the company’s accounting treatment, it would have been reported at fair value based on quoted market prices.

Based on Yancoal’s latest share price of AUD0.10, the group’s 13.2 percent stake will be valued at less than AUD13.5 million (approximately US$10.5 million).

The gap between the two valuations is estimated at a whooping US$667.1 million.

In Iceberg’s report, the valuation gap was quoted as US$603 million after adjusting for share of losses and impairments in 2014.
This would mean that if Noble was to decide to sell its stake in Yancoal at current market prices, a full loss of US$603 million would be recognised.

As inferred from Iceberg’s report, a few other associates listed seem to have received similar accounting treatment.

At the end of the day, it could suggest that Noble’s balance sheet is artificially inflated.

Apart from balance sheet classification, Iceberg also questioned the earnings and losses of the group’s agricultural business, Noble Agri, with regards to its turnaround.

Management Refutes Claims
The fall in the firm’s share price earlier in the day on 16 February has prompted a query by Singapore Exchange Securities Trading.

Noble responded with the following statement on the Singapore Exchange website:

“Noble Group Limited refers to the statements about the Company made by the research firm Iceberg Research.

The Company completely rejects the allegations. All material information to which Iceberg Research refers is in the public domain. There has been no material adverse change since the Company last reported.

The Company reserves its rights against Iceberg Research.”

Truth Or Conspiracy?
For seasoned investors, this event is not the first of its kind in Singapore.

Many would remember a similar incident involving Noble’s fellow blue-chip peer, Olam International, in 2012, when short seller Muddy Waters launched a similar attack.

Share price of Olam have since recovered, with an additional boost of confidence after a Temasek Holdings’ unit, Breedens Investments raised its stake in the firm.

So, is there more truth in this attack on Noble or just some conspiracy by a group of vested short sellers?

It is hard to tell for now, since the author’s identity of Iceberg’s 17-page report was not revealed.

Additionally, the report did not give an indication if the author was engaged in any short-selling positions for the stock, which could undermine the report’s credibility.

From the report, it would seem that Iceberg has the intention to launch a second short-sell report on Noble.

For now though, before more information is shed or cleared, investors are advised to exercise discretion in dealing with the shares of Noble.

Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.

Please click here for more information about this author.

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