Not Everyone Is Negative About Noble Group Limited

Commodities trader Noble Group Limited (SGX: N21) has been facing a lot of bad press lately.

Since the emergence of negative reports on the company written by a random blogger called Iceberg Research, the market has been deeply worried about the firm’s prospects.

This is alluded to by how Noble Group’s shares have fallen by more than 20% to its current price of S$0.945 since the appearance of Iceberg Research’s first report on 15 February.

To date, Iceberg Research has released a total of three reports on Noble Group, criticizing the firm’s accounting practices, corporate governance, and the strength of its balance sheet, amongst other issues.

I’ve covered the three reports in greater depth: Report 1, Report 2, and Report 3.

But despite Iceberg Research’s negativity, there are others who are feeling positive about Noble Group. In fact, HSBC Global Research and CLSA Research had both issued reports on the commodities trader recently that essentially said “Buy.”

HSBC’s buy

According to HSBC Research, Noble Group’s recent fall in price has led the firm’s shares to be trading at forward price-to-earnings (PE) and price-to-book ratios that are at the low-end of certain historical ranges.

There is thus upside potential for Noble Group’s shares if their valuations would regress to the mean.

In addition, HSBC Research also thinks that Noble Group’s deconsolidation of a previous subsidiary, Noble Agri, has helped to significantly strengthen its balance sheet.

But in my view, Noble Group’s not necessarily a bargain just because it’s trading at the lower end of its historical valuation ranges.

After all, the company is facing an unusual challenge now with the criticisms laid out by Iceberg Research. A lower valuation may even be justified so long as Noble Group is not able to address those concerns.

CLSA’s buy

In CLSA’s report, it answered a very pressing issue: What are the long-term prospects for Noble Group?

Even without Iceberg Research’s negative reports, Noble Group’s historical financials have not been something which investors might like to see.

The company’s net profit margins have been declining; its returns on equity (ROE) have been falling; it hasn’t been able to generate consistent cash flow; and its dividends have been sliding too.

A sample of Noble Group's historical financials

Source: S&P Capital IQ

But, CLSA pointed out that the declining profit margins and lower ROEs are mainly due to the restructuring efforts that Noble Group has been on for the past few years.

With most of the restructuring now over, they expect Noble Group’s margins and ROE to normalise and return to higher levels going forward.

Furthermore, with the spinoff of Noble Agri, CLSA thinks that Noble Group’s balance sheet is now much stronger too.

Lastly, the research outfit also pointed out that many of Noble Group’s new ventures, such as X2 Resources and Harbour Energy, may become significant contributors to the company’s business in the future.

What CLSA has shared demonstrates how Noble Group might have brighter days ahead.

A Fool’s take

All these sound great. But we have to note that both research firms are also valuing Noble Group based on their estimates of the company’s future earnings and that is where some problems may arise.

For example, CLSA is expecting a more than 70% increase in Noble Group’s earnings per share for FY2015 and an average earnings growth rate of 15.5% for the next two years after FY2015. That seems a tad optimistic from my point of view.

Noble Group could of course meet those growth assumptions or even exceed them. But whatever the case is, investors should still attempt their own valuation exercise on the commodities trader before investing in it.

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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 company mentioned.