On Monday evening, embattled commodities trader Noble Group Limited (SGX: CGP) released the details of its debt-restructuring plan. This comes after the company had spent the past few years struggling with a crushing debt-load, and accusations about improper-accounting from research outfit Iceberg Research.
The debt-restructuring plan is complex, so I want to touch on one crucial and salient point about it that I think investors should know: What would current shareholders of Noble get if the plan goes through (the plan is subject to approvals from regulators, Noble’s shareholders, and owners of US$400 million worth of the company’s perpetual securities)?
New shareholders are coming in
Here’s a handy graphic from Noble showing the changes to its capital structure if the restructuring plan is implemented (note the red bubbles):
Source: Noble press release
As you can see, a group of Noble’s lenders, who collectively control US$3.45 billion of the company’s bonds at the moment, will become majority shareholders of the company with a 70% stake. Existing shareholders of the company will see their ownership stake in Noble fall from 100% to just 10%.
Noble, at its current stock price of S$0.23, has a market capitalisation of S$305.4 million. For the company’s current shareholders to simply breakeven when the debt-restructuring plan kicks in, Noble will need to have a market cap of S$3.054 billion, which is 10 times the current value. So, the key question now is: Can the commodities trader reach a market cap of S$3.054 billion? Let’s run through some quick and simple (I promise!) valuation-math.
Under the restructuring plan, the graphic below shows how Noble will transform. What’s important to note is that after the restructure, Noble will become an owner of a company that fully-owns two entities: An Asset Co., and a Trading Co.
Source: Noble presentation
The assets held by the Asset Co. – as of 30 September 2017 – have a collective net asset value (or book value) of US$859 million. At Noble’s peak market capitalisation of S$14.41 billion (reached on 21 April 2011), the company had a price-to-book (PB) ratio of 2.7, according to data from S&P Global Market Intelligence. If we assume that the Asset Co.’s net asset value will remain the same after Noble restructures its debt, and we apply a PB ratio of 2.7, we end up with a value of US$2.32 billion (around S$3.04 billion).
Meanwhile, Noble’s number-crunching shows that the Trading Co. will generate annual EBITDA (earnings before interest, taxes, depreciation, and amortisation) of between US$175 million and US$200 million in a steady state. At Noble’s peak market cap, it had a price-to-EBITDA (PEBITDA) ratio of 10.6, according to S&P Global Market Intelligence. If we apply a PEBITDA ratio of 10.6 to the upper limit of the Trading Co.’s steady state annual EBITDA of US$200 million, we end up with a value of US$2.12 billion (S$2.78 billion).
The summation of S$3.04 billion and S$2.78 billion is a very crude – and very optimistic – estimate of the market cap that the restructured Noble could have. And as you can see, it is a fair bit higher than the market cap of S$3.054 billion that Noble needs to have, after it restructures itself, for its current shareholders to breakeven.
But here’s the thing, my valuation estimate – as I had mentioned – is very optimistic. The Asset Co. and Trading Co. are given very high multiples to their assets and EBITDA, respectively. There are also many things that could go wrong. The Trading Co.’s steady-state EBITDA may be much lower than US$200 million, and the Asset Co.’s net asset value may decline sharply over time. In all likelihood, the chances of Noble’s current shareholders breaking even after the restructuring plan kicks in is really low.
Some Foolish (“capital-F” Fool) parting words
Noble has caused much pain for its shareholders in the past few years with the shocking decline in its stock price (from S$12.30 in 30 January 2013 to S$0.23 today). Its latest debt-restructuring plan could compound the suffering.
Here’s the thing: there were early signs that Noble was an extremely risky stock. These signs include the company’s high debt load, the crucial element which has necessitated the existence of today’s debt-restructuring plan. Noble’s experience serves as an important reminder for all investors that debt can be a really dangerous thing in the stock market. Keep a close watch on the balance sheets of the companies you’re invested in, to make sure they’re not strained by too much debt.
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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 Chong Ser Jing owns shares in Noble Group Limited.