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Noble Group Limited - How many investors are joining Rosen Law's class action law suit?

16/3/2015 – The unidentified blogger going by the name Iceberg Research has not changed its view on Noble Group after it rebutted the allegations.

This was Noble's third response after it provided two short clarifications on February 17 and February 26.

However, the market is waiting for the third report that the anonymous blogger is expected to publish soon that will focus on Noble’s debt and its status as an investment grade company

It says it will show that the way Noble reports its debt and its so-called "liquidity headroom" are misleading.

It also claims that Noble does not report its entire debt.

It will write about governance issues, the number of key executives who left the group, and the role of the auditor.

Pre-empting this, Noble already highlighted about its governance and accounting framework on page 15 of the FY14 results presentation.

Iceberg reports mainly focuses on valuation of its associates and fair value gains.

It says E&Y has expressed their "reserves" (sic) in the annual report, for example, in the 2012 annual report: "The management believes that the estimated fair values resulting from the valuation technique, which are recorded in the consolidated statement of financial position, and the related changes in fair values, which are recorded in income statement, are reasonable, and that they were the most appropriate values at the end of the reporting period."

This warning is particularly worrisome, according to Iceberg.

According to Iceberg, E&Y says the US$5.8 bln in fair value gains is in line with "the valuation is management’s beliefs” (sic).

In the second report, Iceberg highlights the difference between net profit and operating cash flows.

It claims that Noble recorded a combined US$2.7 bln net profit since 2009 but its operations lost US$485 mln in cash in the same period.

Similar to Enron, Noble recognises the entire profit for long maturity contracts the same day these contracts are signed, the report said.

It explained how the valuation of commodities contracts leaves ample room for manipulation.

More than 12,000 contracts are included in the fair value gains & losses as shown on the balance sheet, with a weighted average tenor of 5 years, representing more than 1.5 bln tonnes in volume, Noble said in its Q4 results briefing.

According to the company, the timing of the Iceberg allegations was designed to inflict maximum damage.

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

The first report was released one week before Noble's earnings announcement, in the middle of Chinese New Year holidays, and after the stock had rallied 20%, making sensationalist accusations and threatening further reports.

The second report was released one day before its year end results.

There is no other credible explanation for the timing of the release of the second report other than to disrupt the company’s reporting schedule, said Noble.

Call it a coincidence or forced action, Noble announced its first quarterly loss of US$240 mln in more than three years after the allegations.

However, Noble's CEO, Yusuf Alireza, commented during the Q4 analyst briefing that its results were not impacted by Iceberg Research report.

In any case, the company did not give a profit warning.

The company did respond to a Business Timesarticle which said "BT readers would know that since that report was issued, Noble reported a shock US$240m loss for its 4Q, when the average forecast by 13 analysts tracked by Bloomberg was a profit of about US$98m."

Noble clarified by saying that it impaired Yancoal by US$200 mln on the earnings release date of February 26.

This is because production information was received from Yancoal on February 17 and cash flow models indicated by February 24 that impairment should be between zero and US$200 mln.

OCBC Research downgraded Noble to HOLD with a fair value of S$1.05 due to limited upside potential.

DBS Vickers has downgraded Noble from BUY to HOLD and slashed its price target from S$1.60 to S$1.12, which is based on 13 times projected earnings and 1.15 times book value.

"The key question is whether Noble will re-rate near term once the noise surrounding Iceberg Research dies down," DBS Vickers analyst Mervin Song wrote in a note. "Our answer is 'no'."

The company continues to face headwinds from weak coal and iron ore markets, continuing losses from its agriculture business, as well as foreign-exchange volatility, he said.

Maybank Research maintained a HOLD rating as it believes shrinking demand and prices for hard commodities could weigh on Noble's near-term earnings.

It reduced FY15 and FY16 EPS estimate by 10% and 11% to reflect poor results and made lower MMO margin assumptions.

Accordingly, it has nudged down its target price from S$1.05 to S$1.00.

The analyst prefers Wilmar.

While research houses decided to remain on the sidelines after the FY14 results, rating agencies have provided support to Noble by not downgrading their ratings.

And if they downgraded the rating then their credibility would have been in doubt as Iceberg Research questions (Page 17 of the Second Report) rating agencies' investment grade rating despite Noble's poor operating cash flow.

Standard & Poor's BBB-/Stable/--; cnA-/-- and Moody's Baa3 stable rating on Noble have remained unchanged after its FY14 results and allegations by Iceberg Research.

Standard & Poor's believe Noble's improved financial leverage and strong liquidity position in 2014 support the rating, despite weaker earnings.

It says the rating is also unaffected by a follow-up report from Iceberg Research, that claims Noble's fair value accounting is aggressive.

S&P views fair value accounting and the mark-to-market of financial assets and liabilities as an ordinary part of operations for commodity-trading companies like Noble.

So, the company's risk management is adequate.

Moody's Vice President and Senior Analyst, Joe Morrison, believes Noble remains well positioned with adjusted net debt to EBITDA of about 3.2x versus over 4.0x in 2013.

EBTDA interest coverage also improved to about 3.4x from 2.7x.

It also said that Noble's liquidity profile and access to capital markets support its rating.

The company’s FY14 earnings are as follows:

Revenue: +4% to US$85.8 bln
Profit: -46% to US$132 mln
Cash flow from operations: (US$1.1 bln) vs US$805.5 mln
Dividend (FY14): 1 US cent per share vs 0.91 cent per share

The Group has taken a total of US$438 mln in impairments, write-offs and provisions, in addition to the US$93 mln in operating losses of Territory Resources, of which US$200 mln is on its interest in Yancoal.

Impairment amounts were determined based on conservative assumptions, taking into accounting the continued decline in prices and the downward revision of forward price curves.

Question
Question

1. Has Rosen Law filed a class action law suit action against Noble?

New York based Rosen Law Firm is preparing a class action lawsuit to recover losses suffered by Noble Group investors.

It said "The Rosen Law Firm announces that it is investigating potential securities claims on behalf of purchasers of Noble Group Ltd. (OTC: NOBGF, NOBGY) stock before February 16, 2015 resulting from a recent report that claims that the Company exploits accounting issues regarding its associates in order to fabricate profit."

According to the Financial Times, Morgan Stanley analyst Charles Spencer said in a note to clients "We hope management will offer a response to class action lawsuit filed by the Rosen Law firm claiming that Noble Group may have issued materially misleading business information to the investing public".

Perhaps, Noble should update the general public through SGX, if it is true.

Question
Question

2. Will it publish the transcript of the conference call held between the management and analysts on March 4?

The same article published by the Financial Times on March 2 said "In an attempt to reassure nervous analysts and investors, Noble scheduled a conference call for Wednesday where its chief executive Yusuf Alireza and finance director Robert Van Der Zalm will answer questions about its accounting policies and annual results, which were released last week."

However, we couldn't find any update on the discussion on the SGX or on its website.

OCBC Research highlighted that Noble had hosted an analyst-only teleconference to explain their hedging strategy and how Noble marks its contracts to market.

This makes us wonder why only analysts were updated by the management.

(Read the full story to get all 7 questions)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.



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