What Is The Short Attack On Noble Group Limited All About? Part 2

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.”

I have addressed Iceberg Research’s first point in another article, so you can check it out here. In this article, I’d be taking a look at the other points made by Iceberg Research to see if there are any merits to them.

The merits… if any

So, let’s get started with Iceberg Research’s beef with Noble Group’s Agri business.

The background to this is that Noble Group had sold a 51% stake of its Agri business in 2014 to a consortium led by China-based agricultural products supplier COFCO while retaining a 49% stake. The sale, which was for a sum of US$1.5 billion, meant that Noble Group would change its classification of the Agri business from a subsidiary to an associate.

Iceberg Research’s report basically argued that Noble Group had been using accounting techniques to improve the performance of its Agri business in 2014 so as to present it in a better light to be sold off partially.

Moreover, the report seems to indicate that the Agri business had shown a recovery in business performance only because Noble Group had shifted the then-subsidiary’s costs (those associated with deferred tax assets, depreciation, financing, and general expenses) away from it. Thus, the reduction in losses experienced by the Agri business is only an illusion due to financial engineering on Noble Group’s part.

However, according to a response to Iceberg Research’s allegations from Noble Group, the commodities supply chain manager stated that it has already received the US$1.5 billion for the Agri business sale as well as a US$1.8 billion loan repayment from the Agri business. These payments have helped to greatly improve the strength of Noble Group’s balance sheet.

In its response to Iceberg Research, Noble Group also claimed that it has not misinformed the market by artificially improving the performance of the Agri business. Noble pointed out that it has been disclosing the operating performance of the Agri business before selling, administrative & operating cost, interest, and other charges to give a better representation of how the business is doing.

Foolish Summary

To wrap it all up, I think investors should be skeptical about the claims from both parties.

Although Iceberg Research has made strong accusations about the company, the data presented in the report is still questionable.

As for Noble Group, the company’s offloading of a loss-making business – the Agri business – and then making it take on high amounts of borrowings has raised my eyebrows. This is especially so when the Agri business’s status as an associate now would mean that there’s no need for its borrowings to be consolidated onto Noble Group’s own balance sheet (thus helping spruce up the commodities supply chain manager’s balance sheet).

Just because the borrowings of the Agri business is no longer on Noble Group’s books does not mean the latter is necessarily free from any future financial obligations when the Agri business runs into future financial issues, if any.

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 any companies mentioned.