Noble reels from new attack as Muddy Waters joins Iceberg

Singapore

NOBLE Group came under fresh attack on Thursday - this time by shortseller Muddy Waters of Olam fame, which questioned the group's accounting practices.

Despite a brief statement by Noble rejecting the allegations, and takes by analysts that there was no new material information in the latest report, the stock plunged to as low as S$0.84 before ending the day at S$0.86, down 5.5 per cent.

In the report released on Thursday morning, Muddy Waters, observing that Noble has been free cash flow positive for four out of 20 years, said: "Noble seems to exist solely to borrow and burn cash."

Noble thus became Muddy Waters' second target on the Singapore Exchange. The shortseller had criticised another commodity company, Olam International, in late 2012. This prompted Temasek Holdings to step in and take majority control of the firm which also moved to rein in capital expenditure and boost free cash flow after the attack.

US-based Muddy Waters also said that it has short positions in Noble shares. Short interest in Noble has risen from 0.1 per cent at the beginning of this year to 0.9 per cent now, according to market data provider Markit, adding that this, nevertheless, was still a relatively low figure.

Taking an example previously raised by Iceberg Research, Muddy Waters questioned how Noble had bought Indonesian coal miner PT Alhasanie, sold it to two Indonesian lawyers, and later bought it again through a subsidiary, booking negative goodwill and fair value gains each time.

"We are really short on Noble's management . . . Noble's management has adamantly insisted that its accounting is conservative, and by implication, is reflective of reality. We do not believe Noble's management," said Muddy Waters.

It engaged behavioural analysis firm Qverity - founded by former US Central Intelligence Agency experts in detecting deception - to analyse Noble's responses to analysts' questions during its fourth-quarter results conference call, when Noble's management responded to issues raised by Iceberg Research.

"Qverity's opinion is that Noble management has been deceptive in addressing the criticism," said Muddy Waters.

Noble said in response: "The management completely rejects the allegations (and notes that Muddy Waters Research has publicly stated that it has taken a short position in Noble Group's shares). The company is studying the report in detail."

The report by Muddy Waters brought Noble under heavy scrutiny again, just as the dust is beginning to settle on previous allegations by Iceberg Research, which Noble has said is the work of a former employee, credit analyst Arnaud Vagner. The firm has started legal action against him in Hong Kong.

Shares of Noble have declined 29 per cent since Iceberg published the first of its three reports on Feb 15 this year.

Most analysts noted that Muddy Waters did not raise any new issues, but believed that Noble would have to respond more specifically to the allegations to allay fears in the market.

"The management will have a lot more explanation to do. This is really quite a counter-intuitive way of doing things, the way you transfer (a company) so many times," said an analyst. "So that raises doubts."

The report by Muddy Waters also coincides with the launch of a US$2.25 billion committed unsecured revolving loan facility by Noble on Wednesday.

"We believe that access to liquidity and credit at favourable terms is critical for Noble, as it is central to the business model of a supply chain manager," said UBS analyst Louis Chua in a note. "(We) will be keenly watching the costs and subscription levels of the facility as an indication of lenders' confidence."

Concurring, CMC Markets analyst Nicholas Teo said that the biggest risk for Noble is not how much the stock falls. "The biggest risk to Noble is how its business partners, creditors and suppliers, and certainly its bankers view that credit risk in dealing with it in the future. Therein lies the biggest danger."