Noble Group Limited - How much did Noble loan to PT Alhasanie?

28/4/2015 – Noble Group has rejected allegations made by Muddy Waters Research as they are inaccurate, unreliable and misleading.

It categorically rejected the assertion that Noble exists to borrow and burn cash, saying its balance sheet has never been stronger.

Furthermore, the time period of 20 years referenced by Muddy Waters has seen revenues grow from US$377 mln to more than US$85 bln.

Muddy Waters had also omitted the impact that the Agri business has had on group results over the last few years and most importantly, the free cash flow metric quoted in their report incorrectly omits the approximately US$3.4 bln of cash proceeds received from the sale of its 51% interest in Noble Agri.

The group said this is an important omission given that over the past several years the group has made significant investments in its Agricultural Platform, which it substantially recouped through the sale at a premium to book value.

Muddy Waters' report has little new information that differed from the Iceberg Research report.

It alleged the company used "substance-less accounting" and that the financials of its deals to buy and sell Indonesian firm PT ALH had been manipulated and caused "a need to shower."

Noble provided some information about PT ALH but it also said that it will not be providing any further commentary on this asset or the arms-length transactions that were entered into.

GMT Research is another analyst firm that made similar criticism of Noble in a video on their website.

In its latest report "Turning Tax Losses into Accounting Profits" it thinks that while Noble appears to be reporting accounting profits, there is evidence of significant tax losses of about US$1.8 bln.

In the income statement, these had been masked by US$4 bln to US$5 bln in asset revaluations and fair value gains over the past five years, it alleges.

Their lack of cash flow has been concealed by a suspected change in accounting policy, a blow-out in payables and confusing disclosure.

"Should these losses have been made public, we can but presume that the company would have almost no equity, lost its credit rating and would most likely be in creditor administration", said GMT Research.

It has cut Noble's net asset value (NAV) to US$0.43/share, some 50% below the current share price but even this is optimistic, it said.

It said "Sell, Avoid or Short. Alternatively, demand to see the auditor or read the management and/or representation letters."

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

Question

1. How much did it loan to PT Alhasanie?

When Noble purchased PT Alhasanie (PT ALH) in Q3 2011, Noble booked a gain from negative goodwill that reduced its quarterly loss by about two-thirds.

According to Muddy Waters, the most remarkable aspect of the US$46.4 mln negative goodwill Noble booked on PT ALH was that Noble paid only US$300,000 for the company.

In other words, Noble claimed to have bought a company worth US$46.7 mln for only US$300,000 – i.e., Noble found someone willing to sell this gem for 0.6% of its true value.

The February 25th Iceberg Research report highlighted PT ALH as an example of a potentially abusive transaction.

When the dealing in PT ALH was finished in April 2013, both Noble and one of its affiliates, PT Atlas Resources Tbk (PT Atlas), had taken fair value gains from buying PT ALH, says Muddy Waters.

Noble responded that the US$300,000 doesn’t reflect what it loaned Alhasanie earlier.

This indicates that the true cost of the acquisition was US$300,000 plus the Noble debt that sat on Alhasanie’s books.

It said "…Muddy Waters refer to as the total 'cost' of ALH, … fails to take into account the funding and debt that was made available to ALH up to that point that were written off as part of the transaction".

However, Noble did not provide any details about debt in the report.

Hence, our question.

Question

2. Why was PT ALH valued at a higher price by the buyer?

Noble wrote down ALH's value to US$2.1 mln and sold it for US$4 mln to an unknown firm in 2012, again extracting the difference as profit.

Muddy Waters thinks that this unknown firm is a party related to Noble, but Noble doesn’t comment on this.

Noble also said nothing about the final transaction.

This unknown firm sells ALH a few months later for US$4 mln to PT Atlas, a company in which Noble owns 10%.

Atlas considered Alhasanie to be worth US$6.1 mln more, booking that as its own gain.

This raises the question of how Noble could have valued ALH at US$2.1 mln, when a Noble linked company seems to have put a US$10.1 mln tag on it a few months later.

It is also relevant to Noble’s own numbers.

Noble treats Atlas as an associate, which would normally mean counting the associate’s profits in proportion of ownership.

Noble hasn’t said how it treated Atlas’s profits in this case, according to the Wall Street Journal.

(Read the full story to get all 4 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.

Legal notice

While our purpose is to ask the questions which the man on the street would ask, and to help the everyday investor make informed investments, please note that:

Our reports and presentations ('our contents') are not investment advice nor should they be construed as investment advice or any recommendation of any kind; nor meant to cast allegations or insinuations of any kind against any individuals or entities. Before acting on the material in our contents, you should either seek independent advice tailored to your particular circumstances and intentions or rely on your own judgement.

Our reports and presentations express our observations, opinions and theoretical analysis based on the facts that we have gathered or have been provided to us. While we endeavour to ensure that our contents are accurate and are presented in good faith, we cannot and do not warrant the accuracy, adequacy or completeness of the material or that the material is suitable for its intended use; and we disclaim any such warranties express or implied that may be presumed by any party; neither do we take responsibility for the views of companies or other stakeholders or observers or sources quoted or hyperlinked in our contents. While every precaution has been taken in the preparation of our contents, we (and our principals) shall not be liable for any losses or damage or inconveniences due allegedly to errors or omissions in any facts or due allegedly to reliance on our contents in any way whatsoever; nor for any damage to any computer hardware, date information or materials allegedly caused by our contents.

All expressions of opinion and observations in our contents are subject to change without notice and we do not undertake a duty to update and supplement our contents or the information contained herein in the event we obtain any further or more complete information.

©2015 Investor Central® - a service of Hong Bao Media