Noble Group Limited - MANAGEMENT REPLY: In what ways specifically is Iceberg's third report inaccurate, unreliable and misleading?

10/4/2015 – Noble Group is suing Arnaud Vagner and a Seychelles company called Enlighten Ace Ltd. for conspiracy to injure the group.

Arnaud, who worked as a credit analyst at Noble, was apparently fired in June 2013 for misconduct relating to what the company calls "disruptive behaviour".

This action was taken after Iceberg Research recently published its third report that revolves around Noble's governance and debt.

Investor Central received a response from Noble's PR agency requesting to refer to the announcement made on March 23.

The announcement said "We reject their allegations as inaccurate, unreliable and misleading."

This statement was added in the same announcement that informed about suing the ex-employee.

We still have a few questions which remain unanswered.

After applying various adjustments and assumptions, it concludes that remaining equity of Noble is only US$410 mln.

It applied an average price-to-book ratio for Noble’s peers of 1.2 times.

This leads to a valuation of US$492 mln, or a price of S$0.10 per share.

Iceberg Research says it hopes the Monetary Authority of Singapore (MAS) will investigate Noble.

It says the regulator can help establish whether Noble Group has substantially misrepresented its financial status.

In doing so, they would protect the small shareholders.

OCBC Research says these allegations, which Iceberg said were based on publicly available information, are nothing new.

Nevertheless, it believes concerns over fair values are likely to remain, given the more muted outlook for commodities in general.

As such, there will be more near-term volatility in the company’s share price as it will take time for Noble to regain market confidence.

The House maintained its HOLD rating with an unchanged fair value of S$1.05.

It recommends buying at S$0.85 or below.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why has Noble not rebutted on Iceberg Research's third report?

Noble started legal proceedings against Arnaud Vagner, a resident in Hong Kong, Enlighten Ace Ltd, a Seychelles company and any associates, at the Hong Kong High Court for conspiracy to injure Noble Group.

But it has not rebutted Iceberg Research's third report specifically.

Why doesn't Noble simply explain where Iceberg is wrong and prove to the market that its accounting is accurate?

Question

2. Does intra-quarter debt really exist on Noble's balance sheet?

Iceberg Research thinks the level of financial debt that Noble reports every quarter is inconsistent with the level of interest the group pays.

In the first nine months of 2014, the interest incurred by Noble (Continuing+Agri) was on average 5.2%, it says.

It excluded the fourth quarter since the U$1.5 bln received from COFCO in the middle of the quarter distorts the debt computation.

This is on average 2.2% higher than competitors with a comparable rating.

Even if it takes continuing operations only, the conclusion is the same, it says.

Borrowing costs were 4.1%, still 1.1% higher than competitors that are assets heavy and finance these assets by expensive long term debt.

Iceberg Research notes that Noble’s borrowing cost is higher than all the average effective interest rates reported in the annual report in 2013.

By deducting bond interest, and applying the weighted average bank debt interest reported in the annual report, it estimates that Noble paid US$78 mln unexplained bank debt interest on an annualised basis.

Even if it adjust for negative fair values for interest rate swaps of US$27 mln with maturity of less than 12 months from the FY13 annual, it explains only part of the difference.

However, on a conservative basis, Iceberg Research thinks the unexplained interest is about US$45 mln based on US$3 bln intra-quarter debt.

It said "The most likely explanation as to why Noble’s interest is so high is that its bank debt is substantially higher during intra quarter. The amount is subject to many variables. This additional intra-quarter bank debt is by definition short term: it is raised and repaid before each quarter."

(Read the full story to get all 5 questions)

We thank Chelsea Phua from Bell Pottinger for her response.

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