SINGAPORE (Feb 28): DBS Vickers Securities is keeping its “hold” call on Noble Group while raising its target price to 23 cents from 20 cents previously – on the belief that a further re-rating beyond the stock’s current level is “unjustified” without details over Sinochem’s potential investment in the group, and/or a material improvement in free cashflow generation.
To recap, sources told Reuters this month that China’s state-owned Sinochem is in discussion about the possible purchase of an equity stake in Noble, which the commodity firm later on confirmed.
This was followed by the release of a critical report from Iceberg Research, which said Noble was not worth its book value and hence questioned Noble’s accounting practices.
(See also: Noble shares plunge after Iceberg questions Sinochem deal prospects)
“While Sinochem is in discussions with Noble, we believe it is still too early to ascribe a value to the balance sheet items which the market has been questioning for the past two years (i.e. for a re-rating above c.S$0.23), given risk that Sinochem may withdraw, lack of details over structure of any transaction and the carrying value of these assets still falling,” elaborates analyst Mervyn Song in a Tuesday report.
While Song expects the group to return to profitability in FY17 as it is no longer constrained by the need to preserve liquidity, the analyst believes a sustained re-rating on the stock will be “difficult”, given its potential negative free cashflows resulting from the need to build up inventories.
More importantly, he points out that a major obstacle would be the questions raised by Iceberg on quality of the group’s earnings statement, as its FY16 profits were boosted by US$126 million gains on level 3 assets whose valuations were based on inputs determined by the company itself.
(See also: Noble Group swings back to black in FY16 with earnings of US$8.7 mil)
“Nevertheless, as Noble gets back to business, we expect operating cashflows to remain negative as it rebuilds its inventory position. This may place a cap on Noble’s share price performance,” adds Song.
As at 12.26pm, shares of Noble are trading flat at 23 cents.