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Noble slump fails to draw short sellers after Iceberg report

Noble Group Ltd is getting a vote of confidence from an unlikely source: short sellers.

[SINGAPORE] Noble Group Ltd is getting a vote of confidence from an unlikely source: short sellers.

Short interest in the Singapore-listed commodities trader was just 0.2 per cent of shares outstanding as of Feb 20, versus an average 0.8 per cent for companies in the city-state's benchmark Straits Times Index, according to data compiled by Markit Ltd and Bloomberg. The ratio for Noble was 0.15 per cent on Feb 13, the last trading day before an anonymous group calling itself Iceberg Research alleged accounting irregularities at the company and sent shares to the biggest two-day drop since 2011.

Noble, which releases full-year earnings on Thursday, denied Iceberg's allegations and said directors and management are "comfortable" with the company's balance sheet. Traders are reticent to add bearish bets against Noble in part because shares are inexpensive, said Maybank Kim Eng Holdings Ltd. The stock is valued at 8.2 times estimated earnings, 34 per cent less than the five-year average, data compiled by Bloomberg show.

The Iceberg report didn't have "enough meat to change institutional investors' view on the company," said Abhijit Attavar, an analyst at Jefferies Singapore Ltd. "We continue to maintain our long-term positive stance on the company and any correction is a buying opportunity." Noble gained 0.9 per cent to S$1.07 as of 9.47 am in Singapore. The shares have dropped 12 per cent since the Iceberg report was published through Tuesday, reducing the company's market value by S$977 million (S$974 million). The benchmark Straits Times Index added 0.3 per cent in the same span.

Short interest in Noble has held between less than 0.1 per cent and 0.2 per cent of outstanding shares on each trading day this year, according to Markit's data. Noble ranks 20th out of the 30 members.

Iceberg doesn't have any short positions in Noble securities and doesn't work in tandem with funds, it said in its report. The researcher's website contains no analyst names, phone numbers or links to research notes, apart from the 17-page report on Noble.

Noble will post full-year net income of US$484.2 million on Thursday, according to the average of 13 estimates compiled by Bloomberg. Its profit for the nine months through Sept 30 almost tripled from a year earlier to US$372 million, the company said in November.

"Investors should always look at the fundamentals and look at audited information," said Sam Le Cornu, who oversees about US$3 billion in Asian equities at Macquarie Funds Management in Hong Kong and does not hold any Noble shares. "Fundamentals in the long run will always prevail. That's where people should focus their attention and not on negative reports."

Iceberg's report alleged that Noble's balance sheet inflated the value of stakes in other companies, including a 13 per cent interest in Yancoal Australia Ltd.

Directors and management are "comfortable" that the company's balance sheet "fairly presents its book value" under International Financial Reporting Standards, Hong Kong-based Noble said in a statement last week. The Monetary Authority of Singapore, or MAS, is reviewing the report on Noble and said it will take action if securities laws were breached.

"The market knows there's probably not much grounds to actively short it," said Carey Wong, an analyst at OCBC Investment Research in Singapore. "Some of the issues raised by Iceberg were not new. So far, we haven't seen anything concrete to suggest that there's something very wrong." Learning Lessons Nicholas Teo, an analyst at CMC Markets in Singapore, said short-sellers have been burned by previous negative reports on Asian companies after "white knights" stepped in to put a floor under the shares.

In 2012, Carson Block's Muddy Waters LLC spurred a tumble in shares of Noble's peer, Olam International Ltd, by questioning the commodity trader's accounts. Short interest in Olam reached an all-time high of 13 per cent of outstanding shares just before the Muddy Waters founder said he was betting against the company, according to Markit.

Two weeks later, Singapore's state-owned investment company underwrote a sale of bonds and warrants to bolster confidence in Olam, and a unit of Temasek Holdings Pte has since taken a controlling stake in the company. When China Minzhong Food Corp. was targeted by short seller Glaucus Research Group in 2013, PT Indofood Sukses Makmur offered to buy shares of the vegetable processor it didn't already own at more than double the prevailing market price. Both Olam and China Minzhong denied the allegations, saying assertions were motivated to create panic and drive down shares.

"Opened short positions are not as evident here in Noble as in the Olam case," Mr Teo said. "This time round with Noble, the impact and sensation was perhaps a little more diluted because of history. Traders remembered being hurt." For Wei Bin, an analyst at Maybank Kim Eng in Singapore who has a hold rating on Noble, the stock is too cheap to attract much selling pressure as the company takes steps to improve its financial health.

"Noble is making some progress in terms of improving their cashflow and reducing their gearing," Mr Wei said. "That's why the selling pressure on Noble is more muted."