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Analysts: Noble’s Real Value Unknown; Stay Away For Now
Aspire | 16 September 2015
By: Lim Si Jie
Articles (169) Profile

Analysts' update as of 15/09/15

Noble Group’s share price has fallen by almost 60 per cent in the six months since Iceberg’s first report, as the company tried to reassure investors that it has not overstated the value of a series of long-term agreements it has with commodity producers and consumers.

While Noble’s share price recovered after releasing its PricewaterhouseCoopers (PwC) report and asking banker Michael Klein to review options, short selling has since resumed as the market remains sceptical of Noble.

2Q15 Forecast Missed

In its recent quarter earnings release, Noble reported that its revenue has slipped 22 percent year on year (YoY) to US$18,357.0M, mainly due to lower commodity prices.

Due to larger-than-expected losses posted by associates which widened by 185 percent YoY to US$67.7M, Net Profit After Tax (NPAT) eased five percent to US$62.6M.

2Q15 net profit fell five percent YoY, which was below analysts’ expectation. 1H net profit reached only 37 percent of analysts’ full-year forecast.

The energy division achieved strong growth, mainly driven by the oil-liquids business where operating income grew 53 percent YoY. However, the energy coal market remains challenging as demand from China continues to decline. The gas & power division was in line with expectations. Although Earnings Before Interest and Tax (EBIT) fell 18 percent YoY due to an extremely good 2Q14, it improved by 94 percent quarter on quarter (QoQ) thanks to the new gas & power supply contracts signed in 2Q15.

Drag From Metals & Mining Segment 

But good performance in the energy, and gas & power divisions were not enough to offset the decline in the metal division. Besides the continued losses suffered by Noble Agri, the main drag on its 2Q15 results came from its Metals & Mining segment.

Noble reported an operating loss of US$19m and a negative EBIT of US$50m compared to an operating profit of US$161.1M and EBIT of US$108.6M in 2Q14. The key reason for the profit deterioration was a 70 percent plunge in aluminium spot premiums as Noble recorded a net fair value decline of US$487M in 1H15. Its management attributed the loss to the difficult quarter in its Aluminium business in which premiums for metals in key distribution locations have weakened sharply.

Bearish Commodities Market

In view of the bearish outlook for the commodities market in general, analysts are cutting FY15 estimates for revenue by 11 percent and Net Profit After Tax (NPAT) by 17 percent. For FY16, they are cutting revenue estimates by six percent and NPAT estimates by 11 percent on lower metal margins and associate contributions. This in turn lowers the fair value of Noble (based on 9x blended FY15/FY16F EPS).

Full PwC Report Released

Noble also announced the results of PwC’s review of its mark-to-market models, valuations and governance framework. PwC has given positive assurance that Noble’s mark-to-market valuations comply with relevant requirements. It stated that “the individual valuations and overall valuation of the contracts including in the group’s consolidation balance sheet as at 30 Jun 2015 comply in all material respects with the relevant criteria”.

Noble added that PwC has reviewed 12 areas to assess contract valuations and also looked at 35 relevant criteria, including volumes, price, discount rates and reserves.

After the recent attack from Iceberg Research, Noble is slowly improving its transparency. Noble is expected to enhance and formalise procedures for back testing and stress testing of the portfolio as suggested by PwC.

Iceberg Attacks Again

However, Iceberg Research has released a new report criticising Noble’s second-quarter performance and PwC’s review of the group’s long-term commodity contracts.

Iceberg Research said that PwC has not challenged the realism of the assumptions made by Noble Group, but merely reiterated that the commodities group was in compliance with accounting standards.

Is Noble The New Enron?

Iceberg Research compared Noble to the insolvent Enron. In a similar report released by Enron’s auditing firm, Ernst & Young, Enron was reported to be largely in compliance with accounting rules. Yet, Enron ended up becoming one of the largest financial scandals in the world.

The PwC review failed to address the market’s concerns on Noble’s accounting standards. While PwC has affirmed that Noble did not exploit accounting loopholes, investors are more interested to know the real value of the mark-to-market valuations.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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