Noble was the biggest drag on the STI yesterday after plunging 7.9%, wiping off about $640mil of market capitalization. The fall came after Iceberg Research accused the commodities player of using accounting loopholes to hide losses and enhance profit numbers. While Macquarie Equities Research (MER) shares some of Iceberg Research’s views, MER believes that investors’ reaction is overdone.
 
In MER’s research report released yesterday, MER has an ‘Outperform’ rating on the commodity giant and a 12-month price target of $1.60, which is 44% from Noble’s closing price yesterday. Read on for more excerpts….

Event
Iceberg Research published a negative report on Noble. It highlights concerns MER shares, but they are not ‘new news.’ MER finds that the report has a sensational bias, omits any investment positives, and MER does not think all of its analytical inputs are necessarily valid. In MER’s view, the report fails to make the case for Noble being a “repeat of Enron” and offers no justification for its S$0.10 price target. MER sees today’s share price reaction as overdone and reiterate its Outperform rating.
 
Impact
While MER thinks the two principal concerns highlighted by Iceberg are valid risks to the Noble investment story, but they are not ‘new news’. And while MER believes Iceberg’s analysis makes mechanical sense, MER wonders if all their inputs are valid:
 
1) Potential Yancoal Australia write-down: As of year end 13, Noble is carrying its 13.2% stake in Yancoal (YAL AU, A$0.10, not covered) at US$677m on its balance sheet, or S$0.14 per share. YAL’s stock market value is US$11m, so there is a wide gap. But the shares are thinly traded, which can distort market value. This is one reason why Noble can use a financial model, reviewed by auditors Ernst & Young, to value the stake. With sustained weak coal prices, MER has been flagging the risk of further write downs for YAL (2012 carrying value: US$813m). The Noble CEO himself hinted at such a potential outcome at a recent sell side event. Whilst MER does not see the full carrying value at risk, there could be a non-trivial impact vis-à-vis Noble’s S$0.98 book value per share (BVPS) (excluding perpetuals). But, again, MER has been flagging this risk for well over a year.
 
2) Potential adjustment to cash proceeds from Agri stake sale. As noted at the time of announcement , the final proceeds from Noble’s 51% Agri division stake sale to a COFCO-led consortium will be based on a 1.15x multiple of that division’s YE14 book value. This figure has not yet been disclosed. In its report, Iceberg focuses on re-measurement gains that Noble reported in 3Q14 to conclude that the Agri division’s book value may have sharply contracted. This would lead to sale proceeds well below the US$1.5b that COFCO has pre-payed on account ahead of the deal’s closure and surely disappoint the market and us. MER describes Iceberg’s analysis below, but wonder if the input they use to kick off the chain of calculations is valid.
 
Noble gets its chance soon. In a terse rebuttal, Noble clarified that it has seen “no material adverse change since [its last earnings report]”. MER expects a more extensive response on the FY14 results call on Feb 26th.
 
MER’s price catalyst
12-month price target: S$1.60 based on a Price to Book methodology.
 
Catalyst: 4Q14 results and analyst call Feb 26th.
 
MER’s action and recommendation
Whilst MER shares some of the concerns on Noble outlined in the Iceberg report, MER sees today’s share price reaction as overdone.

Source: Macquarie Research - 17 Feb 2015