Noble Group Shorts Finally Get Burned on 22% Rebound in October

  • Shares record steepest monthly advance since May 2008
  • Muddy Waters' Block remains skeptical of asset valuations

Singapore’s most popular short is turning into a great way to lose money.

Noble Group Ltd. has soared since Oct. 8, when bearish bets peaked at a record 15.1 percent of the company’s outstanding shares. The commodity trader jumped 22 percent this month, the most since May 2008. The rebound pared its 2015 loss to 56 percent, still the worst on the Straits Times Index.

What had been a winning bet for short sellers unraveled this month as Noble got fresh funding from its lenders and speculation mounted that the worst of the collapse in commodity prices was over. Bears seem to view the share jump as temporary, with the short-interest ratio remaining elevated at 14.8 percent, Markit Group Ltd. data show. For Jupiter Asset Management Ltd., which owns Noble stock, that’s another positive sign.

“Should commodity prices go up, a lot of those shorts will get covered, lifting the share price,” said Ben Surtees, a London-based fund manager at Jupiter Asset. “We did get to oversold levels about a month ago and we’ve probably seen the worst of that.”

Pacific Investment Management Co. said this month the worst of the commodity collapse is probably past, after a 26 percent tumble in raw-materials prices in the 12 months through September that saw investors shun stocks in related industries. Glencore Plc rallied 21 percent in London this month through Thursday after a 38 percent plunge in September. Wilmar International Ltd. gained 22 percent in Singapore in October, paring its 2015 drop to 3.4 percent.

Noble Slump

Noble lost S$5 billion ($3.6 billion) in market value this year through September after Iceberg Research and short-seller Muddy Waters LLC questioned its accounting methods. The stock’s October rebound was the biggest gain on Singapore’s benchmark equity measure.

Chief Executive Officer Yusuf Alireza this month spoke about his transparency drive at a conference on corporate governance in Singapore. That came two months after the company organized an impromptu investor meeting in August at which Noble set a target to increase operating profit to more than $2 billion in the next three to five years. Asia’s biggest commodities trader is said to be overhauling its metals unit as part of efforts to focus on delivering immediate results.

Black Box

“Most commodities traders are in a big black box,” said Carey Wong, an analyst at Oversea-Chinese Banking Corp. who rates Noble shares at hold. “Shedding some light into that black box is obviously helpful.”

An auditor’s report published in August supported Noble’s accounting practices, with PricewaterhouseCoopers LLP saying the company complied with international rules in valuing long-term contracts. Muddy Waters’ Carson Block, who said in April he was shorting Noble shares, isn’t convinced.

“Noble has never provided meaningful transparency into the basis for its asset valuations,” Block said by e-mail. “A sober inside look at Noble’s assets, along with digging into some of its financing arrangements could even show the company should report negative book value.”

Noble may lose its investment-grade ranking if its liquidity position doesn’t improve in the next one to two quarters, Moody’s Investors Service said last week. Raw-material prices have shown signs of resuming their downward trajectory, with the Bloomberg Commodity Index heading for its third weekly decline.

Fresh Funding

Noble’s success in getting fresh funding from creditors has helped reassure investors that concerns about a possible cash crunch may be overdone, according to Macquarie Group Ltd. The company said on Oct. 19 it completed a $1.1 billion revolving credit facility for use by units Noble Americas Corp. and Noble Petro Inc.

“Noble continues to enjoy the support of its major stakeholders, as is evidenced by the successful completion" of the loan, Stephen Brown, Noble’s spokesman, said by e-mail. “It is clear our increased efforts at transparency have provided greater understanding of our asset-light business and strengthened this support even further."

Noble’s shares dropped 2.9 percent to 50.5 Singapore cents at the close. They fell as low as 38 Singapore cents on Oct. 6.

“It’s always reassuring to investors that the company can continue to finance itself,” said Conrad Werner, an analyst at Macquarie in Singapore. “That’s been a concern that’s caused a lot of people to be negative on the company, trying to flag it as a risk. It’s a good thing to have the support of the banks. It shows they’re still pretty much in the game and it’s business as usual.”

Before it's here, it's on the Bloomberg Terminal.