Noble resumed its downtrend yesterday, falling 0.6% for the day. This came after Iceberg Research released a third report accusing the commodity giant of accounting irregularities. The company has since filed a legal proceeding against Arnaud Vagner, a former employee suspected to be behind Iceberg Research. Macquarie Equities Research (MER) released a report yesterday reiterating its ‘Outperform’ rating with a 12-month price target of $0.92. Read more for excerpts from the research report.
 
Event
Iceberg's third report takes aim at Noble's gearing and corporate governance, and presents its price target methodology.
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Impact
Iceberg's third report highlights the guarantee that Noble (alongside COFCO) has extended vis-a-vis the net debt of the deconsolidated Agri business (Noble's portion is US$1.4b), which management also alluded to on the 4Q14 call. Iceberg then goes on to calculate pro forma coverage ratios using equity and earnings figures that it heavily discounts, based on its view that a significant portion of profits are "fabricated". Not surprisingly, it concludes that Noble would breach most of its covenants under such an extreme bear scenario. But the scenario is beyond extreme, in MER's view, and lacks any balance.
 
Iceberg also highlights high turnover in Noble's managerial ranks, especially the chief risk officer, and the longevity of Noble's board members (10 year average tenure). The former point is a legitimate issue that MER would like management to address on the next earnings call.
 
Finally, Iceberg's price target of S$0.10 is based on a price per book value (P/BV) methodology, which again depends on the unreasonably heavy impairments it applies to Noble's assets, most notably hedging related fair values (>80% of its assumed impairments).
 
Noble has announced legal proceedings against Iceberg - MER does not have an informed view on how they might play out.
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Action and recommendation
MER remains positive on Noble shares. Iceberg has now published the full trilogy it committed to.
 
MER thinks the second report was the most impactful, mainly because it highlighted aspects of mark to market (M2M) accounting that the market was not fully appreciating. It also led to Noble's commitment to raise transparency in future, starting with 1Q15 reporting. That is a good outcome for investors. How much additional detail they provide in terms of the M2M makeup of current and past profits will go a long way to determining the speed of the recovery path of the shares, MER thinks. For now MER expects some relief rally post the publication of (hopefully) Iceberg's last report on Noble.

Source: Macquarie Research - 25 Mar 2015