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Short-selling firm takes aim at Noble

Newcomer Iceberg Research sets a target price of just 10 Singapore cents but says it has no short position on the company



NOBLE Group's shares plummeted 8 per cent on Monday after it became the latest commodity group to have its financials come under attack, this time by a short-selling newcomer, Iceberg Research, which claims it has no short position in the Singapore-listed firm.

Iceberg, in a report dated Feb 15, hit out at Noble's classification of some firms as associates and set a target price for the stock at just 10 Singapore cents per share. "Noble exploits the accounting treatment of its associates to avoid large impairments and fabricate profit," said Iceberg.

Noble's shares fell to as low as S$1.09 in morning trading, prompting a query from Singapore Exchange (SGX). It ended the day 9.5 cents lower at S$1.11 on volume of 63.6 million shares, making it the day's second most actively traded stock.

In its reply to SGX, Noble referred to Iceberg's report and said that it "completely rejects" the allegations made. "All material information to which Iceberg Research refers is in the public domain," it said. "There has been no material adverse change since the company last reported."

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It added that it reserves its rights against Iceberg. The group declined to respond further to queries by The Business Times.

Most of Iceberg's arguments rest on whether certain Noble units should be classified as associates or long-term investments since the accounting treatment is different. Associates are firms in which companies have a stake of between 20 and 50 per cent, or in which they can exert significant influence.

Iceberg said that associates are initially recorded "at cost" on the balance sheet and subsequently, the carrying value is adjusted for the share of the associate's profit or losses (equity method), irrespective of the market value.

For long term investments, companies adjust their carrying value to the fair value of the investments.

Iceberg cited Noble's classification of Australia-listed firm Yancoal as an associate as a typical example of accounting malpractice. It said that Yancoal is valued in Noble's accounts at US$614 million versus its market value of US$11 million, which means that a valuation gap of US$603 million or about US$0.12 per Noble share should be accounted for but wasn't.

"The classification (of Yancoal) as an associate is highly questionable," said Iceberg. "Noble claims significant influence over Yancoal, for example being a major buyer, and avoids adjustment to the market value. However, the significant shareholder is not Noble but state-owned Yanzhou, which controls 78 per cent of Yancoal."

Noble's stake in Yancoal comes from the merger of its subsidiary Gloucester Coal with Yancoal in 2012. The group regards Yancoal as an associate as it exercises significant influence over the firm; Noble provides essential technical information to Yancoal, has its own representative on Yancoal's board, and also has material transactions with the firm, it said in its 2013 annual report.

Iceberg further alleges that Noble has "grossly overstated" the value of Yancoal, resulting in an advantage of Yancoal's valuation not being eroded when Noble recognises its share of Yancoal's losses.

Analysts contacted by BT said that the concerns raised by Iceberg have already been known for the past few years. "It is not something which is completely new news to the market," said Jefferies analyst Abhijit Attavar. "Investors are aware that there is a difference between the market value of their associate Yancoal and the value of the stake on their books."

Concurring, UBS analyst Louis Chua said in a note: "We think this issue has been well flagged, with management noting that it continues to review its balance sheet on a quarterly basis."

Nevertheless, analysts are now expecting Noble to shed further light on its assumptions in arriving at its valuation of associates, as well as its definition of control, when it releases its results soon. "These questions were . . . asked before, but they gave a very cursory answer," said an analyst.

Noble is Iceberg's first target. It said that it has no short position in Noble; nor has it sold any of its reports on Noble. It will be releasing two more reports on Noble, focusing on the fair values of its continuing operations and operating cash flow, and its debt level respectively. "To make it very clear, we do not make any money from this at any level," it said in response to BT's queries. "If this changes, we will advise the market."

Asked for the reason behind the report on Noble, Iceberg said that it was the "right thing to do". "Many have remarked that there were a few odd things in Noble's financials and it is time to put it on the table," it added.

The firm, which is planning to short-sell companies in future coverage, also hopes to gain attention through its coverage of Noble.

"If our arguments are valid, people will pay attention to our research later on," it told BT. The firm, however, declined to reveal more details about itself. Its website does not identify any employees or provide any address or telephone numbers.

The attack on Noble comes nearly 2 1/2 years after US short-selling firm Muddy Waters criticised agri-commodities firm Olam for its accounting practices and overspending on poor investments. Shares in Olam have since recovered, after the firm embarked on a new strategic plan to cut down its capital expenditure levels and boost free cashflows.

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