Noble Group's need for cash is trumping any hope that food trading would become a bigger contributor to profit.
Asia's largest commodity trader said it is in advanced talks to sell the rest of its agriculture unit as it seeks to bolster liquidity through asset sales amid threats to its investment-grade credit rating.
Last month, Noble had said it was committed to Noble Agri, and saw the unit returning to profit amid an improving outlook for sugar.
Chief executive officer Yusuf Alireza is weighing options as he seeks to avoid Noble Group's credit rating being cut to junk while also bolstering profitability and reversing a share-price slump that has made the company the worst performer on the Straits Times Index this year.
Cofco, China's largest food company, which already holds 51 per cent of Noble Agri, is one of the potential buyers, according to a person familiar with the matter. Noble Group is seeking about US$750 million (S$1.06 billion) for the stake, the person said.
"It's a tough call," said Singapore-based OCBC Bank analyst Carey Wong yesterday. While selling the 49 per cent Noble Agri stake may remove a big chunk of negative earnings, any sale also risks losing Noble Group's exposure to soft commodities that are forecast to outperform, he said.
The initial market reaction to Noble Group's late-Tuesday statement was positive. Its shares rallied as much as 12 per cent to 43.5 Singapore cents yesterday and traded at 42 cents at 3.49pm local time, paring their loss this year to 63 per cent. Noble's bonds due in 2020 were set for their biggest daily increase in over two months.
"They're doing what they need to do to restore confidence with regard to their balance sheet," said Baring Asset Management (Asia)'s Hong Kong-based money manager Soo Hai Lim. "It's a difficult environment to be selling assets."
Noble Group took a beating this year as investors shunned commodity companies amid a rout in raw materials, and as short-seller Muddy Waters LLC and a group called Iceberg Research criticised its accounting.
Standard & Poor's and Moody's Investors Service said this quarter that they may reduce the company's credit rating to junk if its liquidity position does not improve. Noble Group has said it plans to raise US$500 million through asset sales to bolster the balance sheet.
"For Noble to lessen its debt level, it's definitely going to help sentiment," said Haitong International Securities credit trader Ray Wepener. "I'd be surprised if the rating agencies act too quickly."
In the third quarter, Noble Group's net income fell 84 per cent to US$24.7 million as sales dropped 20 per cent to US$18.7 billion. While margins rose and tonnages handled were a record, losses widened at its mining and metals unit and from joint ventures and associates, notably Noble Agri.
Still, Noble Group said it saw a strong performance from the unit next year on a revival in sugar.
Mr Alireza said in August that while the company will do what it takes to support the investment-grade rating, it is not needed for the business. After Moody's announced the ratings review, Noble Group said it is confident of meeting the assessor's targets.
Officials from Cofco, which bought the initial Noble Agri stake for US$1.5 billion, did not respond to e-mails or texts seeking comment. A Singapore-based spokesman for Noble Group declined to comment beyond the statement.
"The terms of the sale seem to be about US$700 million, with some sort of trailing stream of income, which seems a bit light seeing the previous sales price for 51 per cent was $1.46 billion," said Lucror Analytics head of Asian high-yield research Charles Macgregor.
"On the surface it would seem insufficient to satisfy the agencies' demands."