Noble Group shorts finally get burned on 25% rebound in October

[SINGAPORE] Singapore's most popular short is turning into a great way to lose money.

Noble Group Ltd has soared since Oct 8, when bearish bets peaked at a record 15.1 per cent of the company's outstanding shares. The commodity trader is up 25 per cent this month, the most since May 2008. The rebound pared its 2015 loss to 54 per cent, still the worst on the Straits Times Index.

What had been a winning bet for short-sellers unravelled this month as Noble got fresh funding from its lenders and speculation mounted that the worst of the collapse in commodity prices was over. Bears seem to view the share jump as temporary, with the short-interest ratio remaining elevated at 14.8 per cent, Markit Group Ltd. data show. For Jupiter Asset Management Ltd, which owns Noble stock, that's another positive sign.

"Should commodity prices go up, a lot of those shorts will get covered, lifting the share price," said Ben Surtees, a London-based fund manager at Jupiter Asset. "We did get to oversold levels about a month ago and we've probably seen the worst of that." Pacific Investment Management Co said this month the worst of the commodity collapse is probably past, after a 26 per cent tumble in raw-materials prices in the 12 months through September that saw investors shun stocks in related industries. Glencore Plc rallied 21 per cent in London this month after a 38 per cent plunge in September. Wilmar International Ltd gained 21 per cent in Singapore, paring its 2015 drop to 3.7 per cent.

Noble Slump Noble lost S$5 billion in market value this year through September after Iceberg Research and short-seller Muddy Waters LLC questioned its accounting methods. The stock's October rebound was the biggest gain on Singapore's benchmark equity measure.

Chief executive officer Yusuf Alireza this month spoke about his transparency drive at a conference on corporate governance in Singapore, two months after the company organized an impromptu investor meeting in August at which Noble set a target to increase operating profit to more than US$2 billion in the next three to five years. Asia's biggest commodities trader is said to be overhauling its metals unit as part of efforts to focus on delivering immediate results.

"Most commodities traders are in a big black box," said Carey Wong, an analyst at Oversea-Chinese Banking Corp who rates Noble shares at hold. "Shedding some light into that black box is obviously helpful." An auditor's report published in August supported Noble's accounting practices, with PricewaterhouseCoopers LLP saying the company complied with international rules in valuing long-term contracts. Muddy Waters' Carson Block, who said in April he was shorting Noble shares, isn't convinced.

"Noble has never provided meaningful transparency into the basis for its asset valuations," Mr Block said by e-mail. "A sober inside look at Noble's assets, along with digging into some of its financing arrangements could even show the company should report negative book value." Noble may lose its investment-grade ranking if its liquidity position doesn't improve in the next one to two quarters, Moody's Investors Service said last week. Raw-material prices have shown signs of resuming their downward trajectory, with the Bloomberg Commodity Index heading for its third weekly decline.

Noble's success in getting fresh funding from creditors has helped reassure investors that concerns about a possible cash crunch may be overdone, according to Macquarie Group Ltd. The company said on Oct 19 it completed a US$1.1 billion revolving credit facility for use by units Noble Americas Corp. and Noble Petro Inc.

"Noble continues to enjoy the support of its major stakeholders, as is evidenced by the successful completion" of the loan, Stephen Brown, Noble's spokesman, said by e-mail. "It is clear our increased efforts at transparency have provided greater understanding of our asset-light business and strengthened this support even further." Noble's shares dropped 2.8 per cent to 52 Singapore cents on Thursday. They fell as low as 38 Singapore cents on Oct 6.

"It's always reassuring to investors that the company can continue to finance itself," said Conrad Werner, an analyst at Macquarie in Singapore. "That's been a concern that's caused a lot of people to be negative on the company, trying to flag it as a risk. It's a good thing to have the support of the banks. It shows they're still pretty much in the game and it's business as usual."

BLOOMBERG