Iceberg initiates coverage on Tutor Perini (TPC). The company’s issues are not restricted to the “unbilled”. Tutor Perini has an impressive number of structural problems that, we believe, are strongly underestimated by the market. Our report is available here.Follow @IcebergResear
Resignation of Noble Group’s CEO, Yusuf Alireza
Our comments are available here.
Questions to Noble’s Management ahead of its April 14TH AGM
We listed our questions before Noble’s AGM on April 14th.
Fourth Report on Noble: How Credibility Collapsed
Our fourth Report on Noble Group is available. PDF here.
“Rumour and gossip”
Before we publish our fourth report on Noble, we review the status of our main arguments to see if really this was only “rumour and gossip” as Noble’s chairman, Richard Elman, recently described them.
Downgrade of Noble Group to junk by credit agencies
With the downgrade to junk and the structural lack of confidence in current management, Noble’s crisis is more acute every day.
Comments on the projected Agri stake sale
Once again the same old accounting tricks are used by Noble.
Comments on Noble’s 9M results
Our comments are available here.
Comments on the PwC review and Noble’s Q2 results
Our comments are available here.
Update on Noble Group (July 21st)
Confidence in Noble is clearly eroding. We explain why the “assurance review” conducted by PwC will not answer the market’s questions. The only hope is a miraculous white knight. Finding one will be a tough job. Our update here.
Questions ahead of Noble’s annual general meeting held on April 17th
We listed our main questions. Please click here.
Third Report on Noble Group, a repeat of Enron: Governance, Debt and Liquidity Headroom
We released our third report. Please click here.
Our comments on FY2014 results and Noble’s rebuttals
We released our comments on Noble’s FY2014 results. We also dissipate the smoke screen covering Noble’s fair values. Please click here.
Second Report on Noble Group, a repeat of Enron: Fair values and Operating Cash Flows
Iceberg Research released its second report on Noble Group.
Summary of findings:
- The divergence between Noble’s net profit and operating cash flows (“OCF”) is striking given its status as an investment grade company. Noble has recorded a combined $2.7b net profit since 2009. However, its operations have lost $485m in cash in the same period. OCF have continued to deteriorate since 2011, e.g. ($620m) outflows in 9M 2014.
- We believe the OCF would have been even worse without the help of inventories repos.
- The reason for the divergence between the paper profit and the OCF is the remarkable increase in the fair values of unrealised commodities contracts (or “mark-to-market”). These contracts surged from near zero in 2009 to an unprecedented net $3.8b ($5.8b assets and $2b liabilities).
- The level of Noble’s fair values has become incredible. They now dwarf all of their competitors (e.g. Glencore). They are 3.5 times the level of Enron’s contracts at its peak, eleven months prior to filing for bankruptcy.
- Similar to Enron, Noble recognises the entire profit for long maturity contracts the same day these contracts are signed.
- We explain how the valuation of commodities contracts leaves ample room for manipulation. The auditor’s opinion on the fair values listed in the annual report is as realistic as its opinion on Yancoal.
- There is very little information provided by Noble on these fair values. We uncovered a few examples of suspicious situations.
- We analysed Noble’s OCF and working capital over the past few years in depth. The group has been largely unable to realise the mark-to-market that matured during that period. Based on this analysis, we believe that at least $3.8b in fair values are overstated and should be impaired. Impairing these fair values dramatically impacts Noble’s performance indicators.
- Like Enron, Noble is now engaged in a vicious cycle: the group needs to constantly print more mark-to-markets to achieve any return on equity targets. There will be no miraculous recovery for Noble: the market will progressively realise that its fair values are largely fabricated.
Click here to download and print the second report: Report 2- Fair values and OCFcFollow @IcebergResear
Iceberg’s comments on the SGX Announcement made by Noble Group on 17 February 2015
In our report, we wrote that the $603m valuation gap for Yancoal is an accounting loophole. It may be formally acceptable from an auditors point of view but it is unreasonable from an investors point of view. We think Yancoal is a straightforward issue. Noble should recognise the $603m impairment (in particular on the $100m paper profit booked in 2012), record the loss, and move on. If Noble thinks that the share price of Yancoal is massively undervalued, the group should increase its ownership percentage.
We maintain that Noble misled the market about the performance of Agri. For example, Noble has not explained why depreciation fell and why Agri’s interest expenses were subsidised by the rest of the group. The really important question is: will Noble disclose the final price paid by COFCO, AND any remaining financial commitment related to this transaction? We have not been able to consult the Agri share sale agreement that was made available to the public in the Bermuda office.
PT Pusaka Agro Lestari’s plantation business licence and a right of cultivation are in order. Our point is that the local government seems to think otherwise. Indonesia has a rather unpredictable legal environment. The political tensions associated to PT PAL will complicate the sale process. However, according to Noble, PT PAL represents only 20-25% of the palm activity, and any future profits or losses incurred upon the sale of the palm assets will be shared equally between Noble and the COFCO led consortium. We will adjust impairments and valuation accordingly.
We did not approach the group to address our concerns because we did not want to alert insiders. We also note that Noble has not answered seven of the eight questions asked at the end of our first report.
Iceberg does not hold any position, long or short, whether directly or indirectly, in Noble’s securities.Follow @IcebergResear
Noble Group: a Repeat of Enron
Iceberg Research initiates coverage on Noble Group, a large commodity trader listed in Singapore, ranked number 76 in the 2014 Fortune Global 500 with revenue of $98b, market cap of $6b, and rated investment grade (BBB-/Baa3).
We show how Noble uses accounting loopholes, or aggressive accounting, in every component of its financials (income statement, balance sheet, cash flows). Noble intentionally misleads credit agencies and investors. The auditor, Ernst and Young, is well aware of the situation. The financial similarities between Noble and the defunct commodity trader Enron are striking (e.g. overvalued assets, contracts fair values, working capital management, debt presentation). The investment grade rating is definitely not justified. We estimate Noble’s equity is less than $360m (from a reported $5.6b) after the various impairments we list in this series of reports. On a price-to-book basis, the value of Noble’s shares is conservatively valued at a mere ten Singapore cents (a 92% fall from the current share price).
The three parts of our research are:
- Associates and Noble Agri
- Fair values (Continuing operations) and operating cash flows
- Real level of debt (gross and net), so-called “liquidity headroom”, auditor and governance
At this date, Iceberg Research does not have any long/short position in Noble’s securities (neither directly nor indirectly) and does not work in tandem with funds.
First Report: Associates and Noble Agri
Summary of findings:
- Noble exploits the accounting treatment of its associates to avoid large impairments and fabricate profit.
- Yancoal is the most representative example, with a gap of $600m between the carrying and market values. However, the accounting technique has been used for other companies.
- Contrary to what Noble’s management claims, the misfortunes of these associates have a substantial cash impact on Noble.
- 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.
- We believe the final price 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.
- Selling the palm oil business will be very difficult for Noble since the licence of one of its subsidiaries has been revoked by the local government.
Click here to download and print the first report: Report 1 Associates and Agri-15022015