Concerns linger after Noble's $1b agri unit sale

Workers carrying hand-picked cotton in Gujarat, India. Cotton is one of the commodities Noble Agri deals in besides coffee, cocoa, grains and sugar. Cofco, one of China's leading providers of agricultural products and diversified food services, now o
Workers carrying hand-picked cotton in Gujarat, India. Cotton is one of the commodities Noble Agri deals in besides coffee, cocoa, grains and sugar. Cofco, one of China's leading providers of agricultural products and diversified food services, now owns 100 per cent of what was a joint venture with Noble.PHOTO: BLOOMBERG

Move increases cash flow, decreases debt but sceptics say it will adversely affect company

Noble Group's US$750 million (S$1 billion) sale of its agricultural unit yesterday will give the commodity giant a much-needed liquidity boost and help it reduce debt.

Market-watchers have backed the move, which was first revealed last week, but some remain concerned over Noble's long-term prospects.

The sale of Noble's remaining 49 per cent stake in Noble Agri to Cofco International in China was closed early yesterday morning.

The firm said it will bring in US$750 million in cash and possibly a deferred sum of up to US$200 million as its entitlement from Noble Agri's future growth.

Noble Agri, which is a joint venture with Cofco, has long been a drag on earnings for Noble.

The sale would lift its cash hoard from US$1.28 billion to US$2.03 billion for the third quarter of this year, going by pro forma calculations based on the firm's third-quarter results. This would give it a pile of cash and committed credit facilities of US$2.7 billion, up from US$1.9 billion before the deal.

The same calculations suggest that net debt would be reduced from US$4.18 billion to US$3.43 billion, while the net debt to capitalisation ratio would also drop from 45.1 per cent to 43.1 per cent.

Noble added it would also be relieved of the corporate guarantee it had to fork out for Noble Agri's debt. This would improve Noble's debt position and leave it above the investment grade requirement set by rating agency Standard & Poor's (S&P).

Noble chief executive Yusuf Alireza told staff yesterday that the deal would help the company explore new growth opportunities in areas such as energy, while parts of its businesses are struggling amid the commodity crunch triggered by China's slowdown.

"It was not an easy decision to sell the balance of an asset that had been patiently built up over many years, but there is no doubt that it is the correct decision in the light of today's market and our requirements and opportunities," he said.

Noble also announced yesterday that it has secured an LNG supply contract with a buyer in the Asia-Pacific region that will run until 2020.

Mr Alireza had said last month that the firm would raise over US$500 million via asset disposal - a target it has now exceeded. He has also cut the company's metal stockpile, while reducing headcount by 15 per cent to achieve an annual cost saving of US$70 million.

These initiatives were part of Noble's year-long struggle against severe market headwinds and investor scrutiny.

Noble shares have pared over 60 per cent since mid-February amid allegations of accounting and debt issues by critics such as Iceberg Research. Investors cheered the news yesterday, sending shares up two cents or 4.55 per cent to 46 cents.

But there were naysayers.

S&P's said yesterday that Noble Agri's sale has no immediate impact on its credit rating, which is at BBB- with a negative outlook.

"In our view, the US$750 million sales proceeds would improve the company's financial leverage and liquidity position.

"However, we also believe the full sale of the agriculture unit could weaken Noble's business position, including its business diversity and long-term competitiveness," S&P said, adding that Noble's liquidity is still weak for its rating level despite the lower leverage after the deal.

Barclays cautioned that Noble will book a fourth-quarter loss of US$546 million as a result of selling the Noble Agri stake, which had a book value of US$1.3 billion.

As the earnings drag from Noble Agri is removed, Noble's low operating profit and cash flow problems will come to the fore.

"Delivery of positive cash flows in the next one to two quarters is a key catalyst for investors to evaluate Noble's ability to deliver on its business strategy," Barclays said in a note yesterday.

A version of this article appeared in the print edition of The Straits Times on December 24, 2015, with the headline 'Concerns linger after Noble's $1b agri unit sale'. Print Edition | Subscribe