Noble Group: Value stock or value trap?

Noble’s stocks have again collapsed after it reported hefty losses in 1Q. Noble’s shares lost 90% of its value since 2012. When will it deliver? Is it a value stock or a value trap?

Noble’s troubles started in 2012… when an unknown research firm, Iceberg Research, compared it to the infamous Enron fraud.

In its first report, Iceberg pointed out that Noble used accounting tricks to overvalue its associates such as Yancoal and Agri. Yancoal was booked as a $600m asset, but its market value is only $11m according to its publicly traded price on ASX.

In its second report, Iceberg pointed out that material differences in Noble’s reported profits and operating cashflow. It said that Noble’s profits were due to ever increasing paper contract fair values. In other words, the earnings are not real.

In its third report, Iceberg point out red flags in its corporate governance and highlighted some instances of suspicious reporting of its debts.

In the fourth report, Iceberg showed that Noble’s management is not credible.

These are serious accusations. Is Iceberg a genuine whistleblower? Or does it have an axe to grind? Is it just groundless accusation by a disgruntled ex-employee as claimed by Noble?

Noble prompted sued. But it is unable to prevent public scrutiny of its accounts. More heavyweights joined the criticism.

  • Carson Block from Muddy Waters questioned Noble’s accounting and business model.
  • Michael Dee, ex-MD of Morgan Stanley, criticised Noble’s management and wrote an open memo to Noble’s employees, urging them to right the ship.
  • NUS Prof Mak Yuen Teen wrote about Noble’s governance fallings.
  • GMT Research discussed Noble’s accounting practices.

Noble defended its accounting practices. But market is clearly unconvinced – its stocks and bonds continue to trade down. Credit default swaps traded up.

To raise cash, Noble had no choice but to sell its assets and make accounting impairments. These actions validates Iceberg’s arguments about asset values and cashflows.

In 2016, CEO Alireza resigned. Insiders William Randall and Jeff Fraser took over as co-CEOs. Richard Elman announced he will step down as executive chairman.

Then out of the blue, there is talk of a potential strategic investor. Noble’s share price surged. Will a white knight finally save the day?

Nope. Those talks fizzled out. In fact, Iceberg recalled several past instances of such ‘strategic buyer’ stories. All fizzled out. Yes, we admit we were also fooled.

Noble is not Olam. Grand daddy Temasek won’t bail you out!

The situation seems dire now. Moody’s and Fitch cut Noble’s credit ratings and warned that it may not have cash to cover its maturing debt.

Noble responded with appointing ex KPMG partner Paul Brough as Chairman. Can he finally deliver the turnaround that eluded so many?

Unquestionably, the stock is cheap. But is it a value stock or a value trap?

What’s our take?

We are unconvinced.If management is committed, 5 years is more than enough  for a turnaround. Just look at Olam.

But if management is not serious, no amount of change is enough. We have seen enough examples of that.

Fool me once, shame on you. Fool me twice, shame on me. Yes, we admit we were fooled before.

What’s your take?

Would love to hear yours?