Noble Group's shares and bonds continue in freefall

Shares in Noble Group continued their free fall on Thursday, as analysts hurriedly slashed their target price for the stock following the firm's shock loss for the first quarter.

Its bonds followed a similar trajectory, tumbling on fears that the commodity trader might have problems meeting its debt obligations.

The company's shares crashed another 24 per cent, or 21 cents, to 66.5 Singapore cents on Friday, reaching a new 15-year low just a day after a record 32 per cent plunge.

Its 6.75 per cent bonds due 2020 fell to trade at about 54 cents on the dollar for a yield of 34 per cent; they had started the week at more than 95 cents.

Noble had announced after the market close on Thursday a loss of US$129.3 million despite a rise in revenue, and attributed this to a dislocation in coal markets and higher oil prices.

Its founder Richard Elman told shareholders to expect a "long, hard slog" to profitability, which the company will most likely regain in the 2018/2019 financial year.

But analysts warn that Noble might take even longer to return to the black, and that the group has limited re-rating catalyst for its shares and bonds in the meantime.

DBS analyst Mervin Song said: "There is risk that losses may continue, due to the inability to effectively hedge the price risk in its coal business, and the still-negative operating cashflows.

"Furthermore, there are questions surrounding the company's ability to secure sufficient liquidity from its key banks."

The change in the structure of the coal market, flattening of the oil-forwards curve and the higher costs of borrowing may delay the recovery in profitability expected by the market, he added.

Mr Song now expects Noble to incur a core loss of US$336 million in the current financial year, with this narrowing to a loss of US$21 million next year; he had previously expected the group to return to profitability this year.

Standard Chartered Bank's head of Asia ex-China corporate credit research Bharat Shettigar similarly raised concerns about the long-term earnings profile of the company, given that it has sold off its agriculture and US gas and power businesses.

Though he believes the sharp drop in bond prices was overdone, he said he does not see positive catalysts in the near term, barring an improvement in earnings or a strategic partner investing in the company.

"Also, the lack of prior warning on the results and management's poor responses to some of the questions on the earnings call may lead some investors to adopt a 'sell now, ask questions later' approach," he said.

DBS' Mr Song slashed his 12-month target price from S$2.30 to S$0.94, while maintaining a "hold" call on the stock.

Macquarie Capital Securities cut its target price from S$1.40 to S$0.70 as it downgraded Noble to "underperform".

Macquarie analyst Conrad Werner said that it looked like future quarters will be under pressure too, going by comments from the company's management.

"With significant headwinds - both old and new - buffeting both its top line and margin drivers, Noble is still deep in the woods, in our view," he said.

With the company having generated negative operating cashflows for the past three years and a weakening balance sheet in the first quarter, some analysts expressed fears over its ability to continue as a going concern on the earnings call on Thursday.

Noble's net debt to equity level has climbed to 98.5 per cent, compared to 83 per cent at the end of last year, said Mr Shettigar.

He estimates the group to have available cash of about US$678 million currently, after repaying US$650 million of unsecured three-year term loans and not renewing a US$615 million unsecured revolving credit facility since March.

While Noble has enough assets, including inventory and net fair-value contracts, to cover its net debt of US$3.6 billion by 1.3 times, this estimate is clouded by the group's level of secured debt as well as doubt over the true size of its net fair-value contracts, he added.

DBS' Mr Song believes that Noble's core bankers will continue to be motivated to provide sufficient liquidity to the group and maintain Noble as a going concern.

Still, these market fears could affect its profitability, he said.

"While it is unclear at this stage whether this has materially impacted Noble's suppliers/customers/counterparties from dealing with the group, it may affect the company's profitability, should confidence in it erode significantly."

Andrea Soh
13 May 2017

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