Singapore’s stock market seems to be an attractive place for a “short attack” these past few years. The term “short attack” is basically used to describe the act of funds or researchers publicly announcing that a company’s shares are worth a lot less than its current market price due to issues such as fraud, poor management of the business, or a simple case of over-valuation. A recent history of shorts In 2012, the research outfit Muddy Waters openly criticised commodities trader Olam Internatonal Ltd’s (SGX: O32) accounting and business model and stated that it held a short position in…
Singapore’s stock market seems to be an attractive place for a “short attack” these past few years.
The term “short attack” is basically used to describe the act of funds or researchers publicly announcing that a company’s shares are worth a lot less than its current market price due to issues such as fraud, poor management of the business, or a simple case of over-valuation.
A recent history of shorts
In 2012, the research outfit Muddy Waters openly criticised commodities trader Olam Internatonal Ltd’s (SGX: O32) accounting and business model and stated that it held a short position in the company’s shares.
Then, in 2013, a research report released by Glaucus Research Group caused vegetable processor China Minzhong Food Corporation Limited’s (SGX: K2N) shares to plunge more than 50% in a single day. Glaucus claimed that China Minzhong had been engaged in fraud.
A year later in 2014, fruit and vegetables canner Sino Grandness Food Industry Group Ltd (SGX: T4B) was the target of an investing report which alleged that the company had vastly overstated its revenue and balance sheet figures.
A new target emerges
The latest company to undergo a “short attack” is commodities supply chain manager Noble Group Limited (SGX: N21). A report, published by a blogger (or group) named Iceberg Research, surfaced on 15 February 2015. Below is a summary of some of Iceberg Research’s important allegations against Noble Group:
- Noble “[e]xploits the accounting treatment of its associates to avoid large impairments and fabricate profit.”
- “The proclaimed recovery of the Agri business in 2014 was manufactured through the use of questionable methods such as subsidies from the group or depreciation cuts.”
- “The price paid for the new associate Agri will be much lower than the provisional $1.5b payment; and/or that Noble will have substantial remaining financial commitments to its new associate. Noble may once again use the accounting for associates to hide the impairment.”
In this article, I’d be taking a look at the first point made by Iceberg Research to see if there are any merits to it. I have addressed Iceberg Research’s other points in another article, so you can check them out here.
Accounting shenanigans… or not?
So, let’s get started. Is Noble Group using loopholes in accounting standards to hide huge impairment losses in its investments in other companies, in the process overstating the strength of its balance sheet?
Iceberg Research’s report had focused on Noble Group’s treatment of its investments in its associates like Australia-listed Yancoal Australia Ltd and Indonesia-listed PT Atlas Resources Tbk.
For instance, the report had pointed out that the value of Noble Group’s investment in Yancoal is more than US$600 million on the asset-side of its balance sheet even when Yancoal’s market capitalisation is only around A$80 million.
But even if we assume for a second that Noble Group might really be overstating the true value of Yancoal, the former has been discussing the market capitalisation of Yancoal – as well as that of all other associate companies – in its annual reports (albeit in the footnotes).
Thus, an informed investor would have more than enough information to know that the accounting value of the Yancoal stake on Noble Group’s balance sheet (more than US$600 million) is markedly different from Yancoal’s market capitalisation (around A$80 million) – Noble Group has not intentionally “hid” the fact from investors.
With that, this brings me to the following thought: Is it all that important to investors even if Noble Group has overstated the asset values on its balance sheet?
Experienced investors in commodity traders such as Noble Group would understand that their accounting book value (total assets minus total liabilities) is hardly a good representation of the true intrinsic value of their businesses. After all, the true value of a commodity trader lies in its sourcing, management, and distribution networks and not its assets on the balance sheet.
So, if book value is not a good representation of Noble Group’s true intrinsic value, any overstatement of the book value on the company’s part – while certainly not a classy nor a desirable thing for any firm to do – is hardly a serious issue in the assessment of the company’s value.
Noble Group may or may not be inflating its assets through overstating the value of its associate companies, but with the company’s discussion of its associates’ market capitalisations in annual reports, investors can easily make their own judgments on the matter.
If anything, this just highlights the importance of reading through the footnotes found in the annual reports of any company you’re interested to invest in – you might just find some interesting information that can change your assessment of a company’s management team or business value.
Iceberg Research has stated that more reports on Noble Group are on the way – I’d be taking a look at those reports (if they come) and come back with my thoughts if I’ve anything noteworthy to share.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in companies mentioned.