Here Is How Noble Group Limited Can Turn Its Share Price Around

It appears that the market’s still bearish on commodities trader Noble Group Limited (SGX: N21) with its shares sliding by 10.5% to S$0.51 as of the time of writing (4:25 pm).

This comes after PricewaterhouseCoopers had conducted an independent review on Noble’s accounting and valuation practices and found them to be reasonable and sound. Noble had released PwC’s report on Monday, the same day that it released its earnings for the second-quarter of 2015.

Noble’s share-price-woes had started on 15 February 2015 when Iceberg Research, a little-known blogger, released the first of three reports criticizing the commodities trader of using aggressive accounting practices to inflate its asset value, among other issues.

Subsequently, Noble was also caught in the crosshairs of other parties like short-seller Muddy Waters and ex-investment banker Michael Dee. From a perch at S$1.205 per share on 14 February 2015, I trust it’s obvious to see that Noble’s shares have traced a painful and protracted decline to where it is currently.

Here are some of the things that Noble has engaged in to try and fend off the negative perceptions:

  • Open rejection of the accusations levelled by the critics
  • Appointed PwC to conduct an independent review
  • Buying back its own shares

As we’ve seen though, all these haven’t been effective in stemming the bleeding. And that’s because, the company’s focusing on the wrong issue here, in my opinion.

An investor’s vantage point

Even if I were to trust Noble’s accounting and take all its numbers at face value, this is what I see from the vantage point of an investor: Noble’s a firm with falling revenue, declining profit, sliding profit margins, and very high levels of debt.

If we’re comparing its financial figures for the year ended 31 December 2012 with those for the year ended 30 June 2015, here’s what we have:

  • A 15.7% slump in revenue from US$94.05 billion to US$79.31 billion
  • An 82.3% collapse in profit from US$471.3 million to US$83.2 million
  • A sinking of the net profit margin from 0.5% to 0.1%.

Meanwhile, over the 12 months ended 30 June 2015, Noble’s return on equity and debt-to-equity ratio are at dismal figures of 1.3% and 111%, respectively, according to S&P Capital IQ.

These are not figures which are found in companies with winning businesses. Yet, Noble’s management seems to have been so caught up with the firm’s critics and its falling share price that there have been no real exhaustive explanations yet on how they plan to turn its business around.

Adding fuel to fire

Meanwhile, Noble’s act of buying back its own stock in the hopes of boosting investor confidence is also a confusing move, in my view.

Noble’s buying back its own shares from the market using an asset (cash); doing so will reduce its equity outstanding. With lower equity but the same level of borrowings, this bumps up the firm’s debt ratios.

But here’s the thing, Noble’s leverage was one of the key concerns that its critics had highlighted. Why would Noble’s management make the firm’s debt ratios worse just to protect its share price, when the high level of borrowings is an important issue among investors?

To compound the problem, there are reports from newswires alleging that Noble has plans to raise additional capital. The options include more bank borrowings, the issuance of a convertible bond to a strategic investor, or even the sale of a stake of itself.

The entire sequence of events have become illogical from an investor’s point of view. First, Noble had used up precious resources (its cash) to buy back shares, thus worsening its liquidity and weakening its balance sheet. Then, the firm now wants to raise more capital and it may be doing so at a time when its share price is low; this may be damaging for Noble’s current investors if the firm opts for options that deal with selling new shares (be it in the form of private placements or the issue of convertible bonds).

If Noble had badly needed capital to protect its balance sheet in the first place, why has management spent so much time and effort to buy back its shares? Wouldn’t fortifying the firm’s financial strength be a more important objective than preventing its share price from falling over the short-term?

Foolish Summary

If Noble’s truly concerned about its falling share price and wants to reverse the situation, spending more time and effort in improving its business fundamentals may be a better choice as compared to trying to prevent share price declines through unnecessary corporate actions.

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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.