|13 August 2015 An Update To Noble Group’s Employees Corporate Digest
This post is republished from a written note by Michael Dee on Iceberg Research’s update on Noble Group. Michael has been in the investment banking scene (ex Morgan Stanley CEO SE Asia, ex Senior MD of Temasek Holdings) for more than 30 years.
Not too long ago I wrote to you to warn you about the problems at your company and how these issues could jeopardize your livelihood.The simple fact that 16 percent of you, or one in six, are now being laid off is the realization of that concern.
I can only conclude that your management, founder and board are in denial as to the extent of the problem at Noble.
Only new leadership at this point will keep your ship from hitting the rocks even more. Recently your CEO wrote a long open letter specifically addressed to me to respond to my concerns expressed in my earlier letter to you. The result of this response was a further collapse of the share price to almost seven year lows.
The release of earnings on 10th August and the PWC review were hoped by management (and frankly by me also) to put all the past issues behind Noble and clear the air.
I believe your CEO said it would draw a line under the concerns of the market. Sadly as I write this the share price is down 12 percent and falling fast at a price level over 60 percent below the level of a year ago.
The current share price is at a steep discount of about 50 percent to your book value which demonstrates a complete lack of confidence in your financial outlook and asset values. Recently one of your largest shareholders sold 33 million shares which is a half percent of total share outstanding, and they were sold at levels even lower than those of today.
You see, not all sellers are shorting Noble, even long term substantial shareholders who have large positions have been sellers and they are intimately engaged with the Noble’s management.
Your second largest shareholder (CIC) sold a third of their holdings late last year totalling about 5 percent of the total shares outstanding. Purchases by major shareholders have been minimal. Your founder, Mr. Elman, has made some small token purchases, yet these provide little comfort to serious market participants. If he wants to make a statement he should be buying at least $150 million of Noble shares.
The firing of 16 percent of Noble’s staff is nothing to celebrate.Such dramatic layoffs are a sign of significant long term problems in the business model which if not rectified will likely lead to even more layoffs or worse.
Your CEO has acknowledged that credit lines have been reduced by some counterparties. As noted earlier, credit is Noble’s oxygen. Noble has bought over $130 million of its own stock to support its flagging stock price. This has had no effect other than to provide a buyer for those investors selling shares.
Your CEO was reported to have purchased over 5 million shares at about $1.00 each earlier this year. This had no impact and only goes to prove he is in denial as to the broader issues the market cares about.
One has to wonder as an employee how many jobs would have been spared if Noble had not repurchased stock at prices above $0.60 when the stock is now $0.50 and invested $130 million in its own staff? How much more cash will be spent in order to repurchase stock and how many more employees will be laid off to pay for it?
Noble has been doing poorly for at least the last five years and this is why the stock is down so dramatically. Iceberg has raised issues which have been on the radar for some time, ignored by management. Noble’s financial results have been terrible. Just yesterday Noble reported revenues and profits were down significantly. No good news there.
Your Executive Chairman, CEO and CFO don’t want to talk about the real story though, that cash flow is still negative by hundreds of millions of dollars, almost $400 million dollars. So with negative cash flow in the first half of the year of about $1 billion, the source of funding for this abysmal financial performance is now to fire one-sixth of you and to borrow more debt. You were warned.
This release of a PWC report that Noble “followed the rules” has had no positive effect on investors. Why?
Well first because three of four members leading the “independent” accounting review were in fact already on the audit committee. Talk about stacking the deck. How many of you as employees have had the chance to review yourselves?
Wouldn’t it be nice if you could do that too? Second, because everyone knows that the review done was very limited and did not address the actual valuation judgements themselves. Third, you should read it yourselves. If you do focus on all the disclaimers up front about what this report is not.
Serious investors have and they are not impressed. They know that when a committee stacked with insiders asks a very narrow question, that they already know the answer they want and will get. And get it they did. PWC should never have let themselves be used in this manner.
And if you want to know why the market doesn’t care or believe in the PWC report, or that the review committee was even remotely independent, just read this sentence from PWC on page 2 of 19 under the heading Scope Restrictions which made it clear that PWC was not to in any way look for fraud in their Mark-to-Market review (underlines added):
“The scope of our work didnot constitute an examination or a review with the objective of preventing or discovering fraud and PWC’s procedures under this engagement are not designed to and unlikely to reveal fraud or misrepresentation by management or staff.”
And if this wasn’t enough to show the worthlessness of this review and report…it continues:
“We provide no assurance that the period covered by our review is free of fraud (whether by management, staff, or by external parties) other irregularities or misrepresentations by management or any other persons.”
Note the underlined end portion above that the PWC’s engagement was “not designed to and unlikely to reveal fraud or misrepresentation by management or staff.” There never was an intention to find out if there was fraud.
The fact is that PWC was hired by a committee where; 1) three of four members were already on the audit committee, 2) the lead director of Noble was a Senior Advisor to PWC for nine years, and 3) the review committee and PWC were in substance reviewing; a) what the Audit Committee had signed off on and b) what your auditor, E&Y, had already rendered an opinion on.
The engagement of PWC was specifically narrowed so as to make the reports outcome a given and to eliminate any work by PWC into areas which the Audit Committee, the Board, the CEO/CFO and, most importantly, the founder did not want explored.
The only possible review which the market will care about is one which follows the model of Toshiba…is composed of completely external parties with an unconstrained mandate to review all accounting practices fully and completely without limitation.
I offered S$10,000 to Singapore Special Olympics if Noble would release the Yancoal valuation model before and after the recent write-down.
Yancoal is an asset which is valued at about $12 million by the market yet Noble valued it at $500 to $800 million until recently revaluing it down to just over $300 million.
The stock value is down about 90 percent since Noble bought it yet they are still in denial. Management still tried to talk their way around how they arrived at the value yet sadly they did not take me up on my offer to release the full model, show investors the valuation and help needy kids. Too bad but not surprising.
So let’s review; revenues down, net profit down, operating cash flow still negative, debt still increasing, $130 million spent buying stock to no effect, bond spreads widening, and then to top it all off, 16 percent of the staff fired. Now remind me again why this was a good earnings release?
There are many good people at Noble who are being poorly led. The stock price is the markets verdict on Noble’s performance and it’s not good. Noble’s management continue to refuse to disclose how much they are paying themselves for their poor performance.
They fire you yet won’t tell you how they get paid. Noble is clearly trying to find a buyer or a major investor to invest. They don’t know what to do and are either trying to sell a damaged ship or get into a life raft.
Management wants us to believe today’s share price is at a depressed valuation. This is true only if; 1) you believe the financials reflect the true financial picture of the company, and the market clearly does not and 2) you believe these valuations do not reflect fraud which PWC has been explicitly precluded from looking for. So we don’t know.
As a banker of over 30 years, I would warn any strategic investor to stay away unless they can conduct full and comprehensive due diligence.
To those lenders, I would highlight that the assets backing your loans as collateral are mostly Mark-to-Market contracts, some for businesses where the assets haven’t even been built yet!
A convertible bond is being touted yet all this does is add more debt to the balance sheet and sell stock at a price below book value. Neither are desired outcomes for investors.
I have tried my best to inform you and your management of the situation and the serious potential problems. They don’t listen and don’t want to talk. Iceberg is not your problem. It is your leadership and your board that is your problem.
Now 16 percent of you will be fired. To the remaining 84 percent I would suggest you look out for you families and hope that first your founder then your senior management and board will be replaced with a team who is pragmatic and realistic in their understanding of the situation.
Hope for the best, but plan for the worst.