Noble falls into the red; expects margins to normalise next year

Singapore

NOBLE Group sank into the red in the second quarter as a lack of working capital constrained its businesses. And with raising liquidity now its overriding priority, the group said it is expecting profit margins to normalise only next year.

The commodity trading group recorded a net loss of US$54.9 million for the three months ended June 30, compared to a net profit of US$62.6 million in the previous year.

This comes on the back of a 32 per cent fall in revenue to US$12.45 billion, owing to liquidity constraints that led to businesses operating "well below" their optimal capacity, said the group.

In an unprecedented open letter that stretched into three pages, the group's chairman Richard Elman urged investors not to judge the group's value and progress by the three-month yardstick. "That this task will take longer than a few quarters is a fact of life, and not a reflection of our effort or determination," he said.

The group's overall tonnage dropped 17 per cent to 55 million tonnes, although volumes in the group's oil liquids and energy coal businesses expanded by 23 per cent and 6 per cent respectively over the previous year. Noble said it had curtailed certain businesses that were not generating required minimum returns, and chose to focus on profitability rather than volumes in its chartering and iron ore businesses as counterparty risks rose.

The group is in the process of closing down its gas and power division in Europe, and mining and metals division in North America and Europe.

It is also selling its power distribution business Noble Americas Energy Solutions (NAES) in the US. This is progressing well, and is expected to reach a close in the next few months, said Noble.

To further reduce costs, it will flatten its organisational structure, rationalise its London office, and close satellite offices.

These measures, coupled with the sale of NAES, the closure of the European power and gas business and the sale of non-core assets, are expected to raise US$1.3 billion, or the balance of the US$2 billion that Noble had set as a target in early June.

The group said it has raised US$700 million so far, with US$500 million coming from the recent rights issue and the remainder from small asset sales.

Noble on Thursday also set, for the first time, an annual earnings target of US$1 billion in operating income from supply chains and US$550 million in earnings before interest and tax for 2018-19.

It had previously only outlined a target gearing level of 45 per cent. This stood at 54 per cent as at end-June, or 47 per cent if the recently completed US$500 million rights issue was included.

The group's liquidity headroom, or the amount of readily available cash and unutilised committed facilities, fell to US$800 million as at June 30, compared with US$1.9 billion at end-March, due to the reduced size of its new revolving credit facility.

Asked whether there would be any risks in the short term if some of the expected asset disposal deals are delayed, Noble's chief financial officer Paul Jackaman conceded that the amount needed to be bigger.

"We are working on that," he said. "We will take care of that headroom as we will any other liquidity concerns."

Responding to another question on why the group has had to approach its bankers for a waiver in the debt covenant for its credit facilities that were just concluded in May, co-chief executive Jeff Frase explained that the change in management had brought about an increased focus on liquidity over profitability.

"That has had consequences on results," he said. Noble's previous CEO Yusuf Alireza resigned in end May for "family reasons".

In his letter, Mr Elman reiterated the group's vision to return to being a "smaller, nimbler, asset light company".

Despite having announced his plans to step down as executive chairman within a year, Mr Elman said he is "determined to be involved in the process of renewal and will not quit until we have restored value".

In a separate announcement, the group said its board has appointed Zhang Shoulin David, a managing director at CIC Capital, as a non-executive director. His appointment is in addition to the current representative that CIC already has on the board.

Mr Zhang, previously a managing director at Barclays Capital, is responsible for CIC's investments in agriculture, forestry, fishery and livestock industry.

Noble shares closed 0.7 cent higher at 15.5 Singapore cents on Thursday before the results announcements.