[SINGAPORE] Noble Group Ltd's need for cash is trumping any hope that food trading would become a bigger contributor to profit.
Asia's largest commodities trader said that it's in advanced talks to sell the rest of its agriculture unit as it seeks to bolster liquidity through asset sales amid threats to its investment-grade credit rating. Last month, Noble had said it was committed to Noble Agri Ltd, and saw the unit returning to profit amid an improving outlook for sugar.
Chief executive officer Yusuf Alireza is weighing options as he seeks to avoid Noble Group's credit rating being cut to junk, whilst also bolstering profitability and reversing a share-price slump that's made the company the worst performer on Singapore's Straits Times Index this year.
Cofco Corp, China's largest food company that already holds 51 per cent of Noble Agri, is one of the potential buyers, according to a person familiar with the matter. Noble Group is seeking about US$750 million for the stake, the person said.
"It's a tough call," Carey Wong, a Singapore-based analyst at Oversea-Chinese Banking Corp, said by phone on Wednesday. While selling the 49 per cent Noble Agri stake may remove a big chunk of negative earnings, any sale also risks losing Noble Group's exposure to soft commodities that are forecast to outperform, according to Mr Wong.
The initial market reaction to Noble Group's late-Tuesday statement was positive. The shares rallied as much as 12 per cent to 43.5 Singapore cents on Wednesday, and traded at 42 cents at 3.49 pm local time, paring their loss this year to 63 per cent. Noble's bonds due in 2020 were set for their biggest daily increase in more than two months.
"They're doing what they need to do to restore confidence with regard to their balance sheet," said Soo Hai Lim, a Hong Kong-based money manager at Baring Asset Management (Asia) Ltd.
"It's a difficult environment to be selling assets."
Noble Group has been battered this year as investors shunned commodities companies amid a rout in raw materials, and as short-seller Muddy Waters LLC and a group called Iceberg Research criticized its accounting.
Standard & Poor's and Moody's Investors Service said this quarter that they may reduce the company's credit rating to junk if the liquidity position doesn't improve. Noble Group has said it plans to raise US$500 million through asset sales to bolster the balance sheet.
'BE SURPRISED' "
For Noble to lessen their debt level, it's definitely going to help sentiment," said Ray Wepener, a credit trader at Haitong International Securities. "I'd be surprised if the rating agencies act too quickly at this point." In the third quarter, Noble Group's net income fell 84 per cent to US$24.7 million as sales dropped 20 per cent to US$18.7 billion.
While margins rose and tonnages handled were a record, losses widened at its mining and metals unit and from joint ventures and associates, notably Noble Agri. Still, Noble Group said that it saw a strong performance from the unit next year on a revival in sugar.
Farm commodities are seen as a bright spot among raw materials in 2016, with most crop prices set to average higher for first time in several years, BMI Research said in a report on Monday. Agricultural markets are tightening slowly but steadily, a trend that will continue into 2016, it said.
Sugar climbed on Tuesday after researcher Platts Kingsman said a global shortfall will be larger than forecast. The deficit will widen from 5.26 million metric tons this season to 7.81 million tons in 2016-2017, the unit of McGraw Hill Financial Inc said in a report. Sugar is the third-best commodity performer this year after cotton and soybean oil.
CEO Mr Alireza said in August that while the company will do what's needed to support the investment-grade rating, it's not required for the business. After Moody's announced the ratings review, Noble Group said that it's confident of meeting that assessor's targets.
Officials from Cofco, which bought the initial Noble Agri stake for US$1.5 billion, didn't respond to e-mails or texts seeking comment. A Singapore-based spokeswoman for Noble Group declined to comment beyond the statement.
"The terms of the sale seem to be about US$700 million, with some sort of trailing stream of income, which seems a bit light seeing the previous sales price for 51 per cent was US$1.46 billion," said Charles Macgregor, head of Asian high-yield research in Singapore Lucror Analytics Pte. "On the surface it would seem insufficient to satisfy the agencies' demands."