Update: Noble Group still 58% away from analyst stock price targets

[SINGAPORE] Noble Group Ltd's slump is creating Singapore's biggest disconnect with analyst target prices.

The commodity trader's stock would need to rally 58 per cent in the 12 months from Friday's close to meet the average strategist's forecast, the widest gap on the Straits Times Index. While Barclays Plc joined at least four other brokerages in cutting target price since the start of May, the bank's projection implies a 75 per cent rebound. The worst performer in 2015 on Singapore's benchmark equity measure, Noble Group fell 2.8 per cent to 68.5 Singapore cents at the end of trading.

Noble Group is confronting research firms questioning its accounting and business model at the same time growth in Chinese demand for coal and iron ore slows. Founder and Chairman Richard Elman has rejected the allegations, writing this week to shareholders asking for patience, and buying about S$13.3 million of shares since Iceberg Research's first report in February.

"It will still take time for the company to regain the market's confidence even though it has made efforts to improve transparency and disclosures," Oversea-Chinese Banking Corp. analyst Carey Wong wrote in a report.

Noble has declined for six straight months and is down 14 per cent so far in June. The company trades at 0.7 times book value, near its lowest valuation since 2008, according to data compiled by Bloomberg. That compares with multiples of more than 1 for rivals Glencore Plc and Olam International Ltd.

"We enjoy the support of our core shareholders," Noble Group chief executive officer Yusuf Alireza said in an e-mailed response to questions from Bloomberg, saying China Investment Corp plans to replace its outgoing representative on Noble's board and has boosted its stake in its agricultural business.

The company has "been through difficult times in the past weeks," but will work to "right the damage" and boost the share price, Mr Elman wrote in a letter to investors Thursday. The shares advanced 9.3 per cent Thursday on elevated volume. Part of that was the company buying back 25 million shares, according to a regulatory filing.

Short interest rose to 5.9 per cent of Noble Group's outstanding equity on June 10, Markit Group Ltd. data compiled by Bloomberg show. That compares with less than 0.2 per cent on Feb 13 before Iceberg Research started publishing reports questioning the company's accounting. Muddy Waters took a short position on the stock in April and criticised Noble's cash flow and management.

While seven of the 14 analysts covering Noble still have buy ratings, they've pared price targets since the company posted a quarterly loss in February. OCBC is the most pessimistic, cutting its fair value estimate to S$0.61 from S$1.05 on Thursday. It's the only brokerage predicting that shares will decline.

"The shares look very tempting at these levels but it's not something we would really want to be involved in given the lack of transparency in their major contracts," Soo Hai Lim, a Hong Kong-based money manager at Baring Asset Management (Asia) Ltd, said by phone. "Noble derives a lot of their income from revaluation of financial contracts, which we don't have much visibility on." Baring doesn't hold Noble shares.

Standard & Poor's revised Noble's credit rating outlook to negative from stable Thursday, citing the commodity trader's higher earnings volatility due to "growth in fair value gains" from the company's long-term contracts. It maintained its credit score at BBB-, the lowest investment grade.

"S&P's decision increases the credit risk and a downgrade in the next six to 24 months can't be completely ruled out," Rishabh Tiwari, an emerging markets portfolio manager at Swiss Life Asset Managers in Zurich, which holds Noble bonds, said.

The company's US$1.21 billion of 6.75 per cent 2020 notes slipped 0.52 cents to 100.15 cents on the dollar as of 5:23 pm in Singapore, according to prices compiled by Bloomberg. The bonds have fallen about 1.6 cents since June 5, capping a 5.3- cent loss over the past three weeks. That's the steepest decline since a 7.9-cent move in the two weeks ending Feb. 27.

Mr Elman bought about 15.8 million shares since March, bringing his stake to more than 21 per cent. While Prudential Plc unit Eastspring Investments Ltd. increased its stake to more than 7 per cent in May, Invesco Ltd cut its holdings to less than 5 per cent this month, filings show. The fund managers declined to comment on their Noble share transactions.

Jefferies Group LLC published a report Friday maintaining its Buy rating on the stock and a 12-month price target of S$1.30.

"When we see Richard Elman buying shares, I think it's a positive sign," Conrad Werner, an analyst at Macquarie Group Ltd in Singapore, said by phone. "If the biggest shareholders are buying more, they obviously feel comfortable with the story and the direction of the company." Noble has already taken a hit on its Yancoal Australia Ltd. asset, which was the main risk to its outlook, Mr Werner said.

The company posted a quarterly loss in the last three months of 2014 after writing down more than US$200 million on the value of its stake in the operator of seven Australian coal mines, an investment that drew scrutiny from Iceberg. The company started to publish more information, including data on net fair-value gains, or the estimated value of future contracts, when it released first-quarter results last month.

"Concerns on its disclosures led to a decline in shares, but this may be a long-term positive in so far as it forces greater financial transparency," Barclays analyst Ephrem Ravi wrote in a note in May, while cutting his price target by 25 per cent to S$1.20. "Noble Group is in a much better spot than a couple of years ago, having disposed of its loss-making agri business and reduced balance sheet leverage to lows not seen in over a decade.' Noble sold a majority stake in its food division to Cofco Corp., China's largest grain trader, for US$1.5 billion in April 2014 to free resources for its more profitable mining and energy businesses.

GlobalCoal's Newcastle thermal price, a benchmark index for the Asia-Pacific, slid 5 per cent since January, extending declines for a fifth year. There's a risk of further losses as commodity prices continue to slide, according to Jupiter Asset Management Ltd.

''There are too many unknowns at this juncture to add this stock with enough level of comfort," Ben Surtees, a London- based fund management director at Jupiter Asset Management, said by e-mail. His firm held 980,000 Noble shares as of March 31, according to data compiled by Bloomberg. "Commodity sell-off may not be complete so not inclined to add yet."

BLOOMBERG