Noble Group Limited - Will it write down its stake in Yancoal by US$600 mln?

18/2/2015 – Noble Group says it welcomes reports that allegations made by a mysterious author attacking the commodities trader for aggressive accounting have been referred to the Monetary Authority of Singapore.

“Noble welcomes this development and will fully co-operate with, and fully support, the MAS investigation," the company said in a brief statement to the Singapore Exchange Wednesday morning (Feb 18).

Meantime, ratings agency Standard & Poor’s says its view of Noble Group has not changed, after the research company claiming to be called Iceberg Research alleged that Noble had overvalued assets, fair values of contracts, and other misrepresentations, and would have to take impairment charges.

Noble shares fell 7.9% on the news on Monday, and continued to fall Tuesday, but recovered in Wednesday’s session after publishing a 2-page rebuttal, and hinted at more disclosures to come.

The Iceberg report talks about Noble exploiting the accounting treatment of its associates to avoid large impairments and to fabricate profits.

S&P doesn’t take a view whether the allegations are correct or not, simply saying “impairments are non-cash items and not included in ordinary earnings. Impairments would not directly affect Noble's credit metrics because we exclude non-cash items from our calculations of financial leverage and liquidity”.

The Iceberg report stressed ASX-listed Yancoal as the most representative example, with a gap of US$600 mln between the carrying and market values.

The report also takes issue with Noble’s stated recovery of the agriculture business in 2014.

Iceberg claims this was manufactured through the use of questionable methods such as subsidies from the group, or cuts in depreciation.

Third, the report says that selling the palm oil business will be very difficult for Noble because the licence of one of its subsidiaries had been revoked by the local government.

The research house estimates Noble's equity is less than US$360 mln versus a reported US$5.6 bln after taking into account various impairments it had listed in its report.

It values Noble's shares at just S$0.10.

Iceberg promises to publish another report, saying it will show that as poor as Agri’s situation may look, the real accounting issues of Noble are actually with the continuing operations (Energy and Metals), in particular the most Enron-esque aspect of Noble’s financials: fair value.

It says it will address what it called the illusion that continuing operations are the healthy part of Noble.

It is unclear who is behind Iceberg Research.

Its website was registered only last month, on January 18, and the only published report was about Noble Group.

Macquarie Research said two concerns highlighted by Iceberg - a possible write-down of Noble's 13% stake in Yancoal Australia and questions over proceeds from a stake sale in its agriculture business to a consortium led by China's COFCO - were valid but not new.

"Iceberg’s conclusions are biased to the sensational, it omits any investment positives, and we wonder if all of its analytical inputs are valid," the brokerage said in a note that reiterated an OUTPERFORM rating on Noble shares.

OCBC Research says it was unable to get clarity from management due to the blackout period ahead of its earnings announcement.

It believes it is best to put its BUY rating and S$1.30 fair value UNDER REVIEW.

In the meantime, it will be going over some of the allegations raised by Iceberg Research and hopefully get some answers from management during the results teleconference next week.

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

In the interests of timely publication, we are publishing our report first and will update it after Chinese New Year, in the hopeful event we receive a reply.

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