Noble Group - Goldman Sachs

The recent 1MDB saga involving the "misappropriation" of funds involving certain high profile individuals has suddenly brought Goldman Sachs Inc (GSI) to the forefront. The investment banker had been involved in raising US$1.75b in bonds for 1MDB in March 2012 through a private placement exercise that was done in very low key fashion, avoiding the main capital marketplace and off the radar of most capital watchers. The interest rate for the bonds was quoted at a high 5.99 %. This was much higher than the industry average, if the interest rate of those offered by Petronas at 3.9 % is anything to go by. For this, GSI was paid a questionable fee amounting to a staggering US$196.2m. It looks like the reputation of Goldman Sachs has taken a hit with it being involved in a deal that is now looking very contentious, and it certainly raised some eyebrows as to whether some level of professional integrity had been compromised in exchange for the huge fee which it received.

Which brings to mind the subject of Noble Group. If I were a Noble Group investor I would not only be feeling uneasy after the allegations brought forth by Iceberg Research and Muddy Waters, but also by the fact that the current CEO of Noble Group, Mr Yusuf Alireza, was also a high profile director of Goldman Sachs Inc - Asia before he switched over to Noble Group in April 2012. The uneasiness really came about after news broke about the 1MDB saga.

It looks like Noble Group's management is trying to stage manage the resurrection of its fast devaluing market price by continuing to use borrowed funds to purchase treasury shares. It has just announced on 27 Jul another sequential buying in of 17.6m shares at an average price of 0.638, and now holds a total of 191.8m such shares. As at time of writing, its market price has just drifted down another rung to 0.60 (as at 1.40 pm 28 Jul) which meant that those lots purchased just yesterday has already shown a book loss of $670,000 within 24 hours. Inevitably, these desperate attempts at trying to stop the erosion of its share price value clearly shows out a certain degree of professional "incompetence" in its management, viz. :

a). Based on the principle of management by objectives, the purchase of treasury shares is usually done by companies which have excess unutilized funds, i.e. companies with net cash position (preferably above their net loan liability, or at least equal to it). Such investment would not carry any interest or opportunity cost. In Noble's case, with 191.8 treasury shares, it would mean $115m (at 0.60) of borrowed cash is being locked up there for which the group would be incurring an interest expense of $50,000 pm ($600,000 p.a.) at, e.g. 5 % interest, had they been converted to cash, not counting the opportunity cost had such money been directed elsewhere, whether operationally or into other forms of investment. In fact, such expense need not be incurred at all because there appeared to be no direct need for the loan in the first place.

b) Buying in of treasury shares must be done, not solely based just on the need to address its sliding share price at all cost, but also after the fact that due diligence be first made. In other words, it should only be conducted after due process of market analysis, industry studies, price chart movements, market sentiments, etc., have been duly done. It seems the string of purchases in Noble Group's treasury shares have mostly been done even though the market was experiencing a slight meltdown and facing uncertainty the last few months (and the foreseeable ensuing months as well), with the Greek Crisis and the recent market meltdown in China, etc. It is a fact that a large part of the total cost of buying in of the 191.8m treasury shares, which the management had undertaken from day one after the Muddy Waters report and then the subsequent Iceberg Research reports, is now showing a huge book loss based on today's market price. ...and still counting.

To sum up in one phrase, the action of the sequential buying in of treasury shares appears to be based on indiscreet, rash, and probably, desperate decisions.

For those who are still following the development of the financial position of the Noble Group since the disclosures of contents in the Muddy Waters and Iceberg Research reports earlier this year, perhaps they should take note that since 12 Jun 2015 the management has made some 10 series of share buy back exercises resulting in a total of 191.8m treasury shares being purchased amounting to roughly $131m (at the approximate average price of 68.4 cents per share). These exercises were done during a period when the market sentiments were weak, especially in the Asian region, and in particular, the China market recently.

The share price of Noble Group has now dampened to 0.535 (as at reporting time 1.20 pm) in line with a marked market sell down over the last few days and a general weakening market over the past few months. The aggregate value of its treasury shares has, predictably, dropped by more than 20 % since the share buy back program started one and half months ago. The management had chosen the worst of time to institute a share buy back program and to go operational immediately even though the market was volatile and sentiments weak. One has to wonder whether it is a reflection of the incompetence in financial management or the need to address the continuous slide and erosion in the value of its share price to maintain the confidence of, not the average investors in the street, but the managers of capital funds and large capital market players, as after all the group is dependent on these fund providers for their survival, being heavily dependent on roll over facilities through funds obtained from new placements to pay off older ones.

With no loan or debt retirement policies in place, any sudden or protracted series of drop in its share value would undoubtedly send shivers to the fund underwriters in a matter of time. The Noble Group seems to display a lot of characteristics similar to the Enron Group before it collapsed under its own weight a few years ago, when the large capital market players were touting the group and selling them to both the market and through private placements even though its underlying financial fundamentals were in a mess. I hope for the sake of the retail investors here that this would not turn up to be the case for the Noble Group.

Aquarius I really appreciate your afford & concern in warning retail investors of Noble Magement in making desperate and foolish decision in buying treasury shares using borrow fund.

I believe there are still many retail investors who were still attracted or sucked in because of Noble falling price thinking it is cheap! cheap!

Whether to believe Muddy Waters & Iceberg Reseach earlier this year, personally I will keep miles away from any stock that is facing headwind.

@Rock

Further to what I have commented a while ago, in fact, after a few minutes after it was posted here, the MAS had also given a Trade With Caution warning regarding the Noble Group. This was in regard to the drop in its trading price which exceeded 10 % (the trigger point for such alert). But it must be pointed out the object of the MAS alert was not the result of any specific discovery but only following the new regulatory mechanism to ensure fair trading practices in the market, especially when a particular counter may be the target for short sellers.

FA aside, NOBLE is a punter's stock now during blackout period b4 2q earnings report. No share buyback to support price, so can buy and hold until buyback resume. Today closed at 52 cents. Will tikam tomorrow if it goes below 48 cents.
Just my 2cents.