This week, Noble Group announced that it has hired auditor PricewaterhouseCoopers to review the way it values some of its assets — its biggest move yet to boost transparency after an attack on its accounting practices.

Allegations by Iceberg Research in February that Noble was inflating its assets by billions of dollars have wiped 40% off Noble’s market value. Noble which was trading at a six-year low of $0.645 on 10 June has rebounded 10.9% in the last 4 weeks.

Macquarie Equities Research (MER) sees Noble’s latest move as a positive and proactive one, and believes the stock is cheap at the moment. Read on for more excerpts from the report...

Here are the excerpts from the research report published yesterday on 7 July 2015:
 
Event
Noble has just announced that a committee consisting of four non-executive board members has appointed PricewaterhouseCoopers to conduct an assurance review of Noble's mark to market (M2M) models, valuations and governance framework.
 
MER thinks uncertainty around Noble's M2M fair value balances was a key area of overhang on the stock yesterday, so MER sees this as a positive and proactive move.
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Impact
Noble is carrying a net US$4.1b of fair value gains on its balance sheet as of the first quarter of 2015. Within that US$1.1b are classified as "Level 3", i.e. where one or more valuation inputs are unobservable. Level 1 and 2 fair values rely on quoted or observable pricing inputs.
 
Based on MER’s interactions, their sense is that the market is concerned about the 'true' fair values of these balances. Views range from questioning the entire US$4.1b to just the US$1.1b of Level 3, which is where discounted longer term off-take deals are housed. Noble's shareholder equity (excluding perpetuals) was US$4.7b as at the first quarter of 2015.
 
With this review, MER hopes to get resolution to these concerns. It is impossible for MER to handicap the potential outcomes from PwC's review. For now, MER sees the company's proactive stance on transparency as a clear positive (from Noble's release it sounds like management supports the independent committee's review).

Action and recommendation
Noble is trading at 0.78 times its book value per share (excluding perpetuals), which MER thinks is cheap given the rising return-on-equity profile post the divestment of 51% in its Agri business and renewed focus on asset light Energy trading. MER’s main concern is more on free cash flow than M2M balances. MER is looking for improved free cash flow metrics from second quarter of 2015, as the big investment in oil contango trades (fourth quarter of 2014 to first quarter of 2015) should be behind us.

MER has an Outperform rating on Noble Group with a 12-month target price of $1.35.

Source: Macquarie Research - 8 Jul 2015