News analysis

Noble and Sinochem - two businesses made for each other

Noble Group is in talks over a strategic investment, with the potential suitor being Chinese SOE Sinochem. Investors welcomed the prospect, driving Noble shares up by as much as 17 per cent.
Noble Group is in talks over a strategic investment, with the potential suitor being Chinese SOE Sinochem. Investors welcomed the prospect, driving Noble shares up by as much as 17 per cent.PHOTO: REUTERS

Sinochem's oil business sales fit well with Noble's trading activities in energy

It's Valentine's Day, so it's no surprise that even the ugliest ducklings in the corporate world are hoping to find love.

Noble Group, whose shares were down 93 per cent from their 2011 peak as of Monday, is in talks over a strategic investment, the Hong Kong-based commodity trader said yesterday. The potential suitor is Chinese chemicals giant Sinochem Group, people familiar with the talks told Bloomberg News' Javier Blas earlier.

It's no compliment to say that the two businesses appear to be made for each other. Noble and state-owned enterprise (SOE) Sinochem, along with its listed subsidiary Sinochem International, operate on gossamer-thin margins on a good day - and lately, there haven't been many good days.

Debt is also a major burden. In a world where the median S&P 500 energy company has net debt of 2.9 times Ebitda (Earning before interest, tax, depreciation and amortisation) analysts expect Noble to post a ratio of 7.3 for the 2016 fiscal year and Sinochem International to come out at 5.

Sinochem chairman Frank Ning is a born dealmaker who's been picking off Noble assets for years. As chairman of state-owned food giant Cofco until last January, he led the two-stage purchase of Noble's agricultural-trading business for about US$2.25 billion (S$3.2 billion) in 2014 and last year. Since he moved to Sinochem, he's been pushing for the company to merge with China National Chemical, or ChemChina, the Financial Times reported last October.

What exactly would these two see in each other?

Sinochem Group has been diversifying for decades and in many ways resembles an oil company more than a chemicals group these days: The 254 billion yuan (S$52.5 billion) in sales from its integrated oil business in 2015 was equivalent to two-thirds of its 381 billion yuan total revenue.

That's a neat fit with Noble, whose trading activities make it a major player in the energy business. Revenue from its oil, coal, gas and power units came to about US$42 billion over the 12 months through last September.

Noble also looks relatively cheap. Even after a US$2 billion-odd capital reduction last year from selling new shares and divesting its North American power-trading business, the stock is still at a 40 per cent discount to its book value.

Pumping in cash from China Inc's magic money box in exchange for shares might help put Noble's leverage on a more sensible footing, assuming existing shareholders such as outgoing chairman Richard Elman are prepared to put up with the dilution. Investors certainly welcomed the prospect, driving Noble shares up by as much as 17 per cent yesterday.

Assume, for the sake of argument, that Sinochem bought a 49 per cent stake in the company at a 30 per cent premium to the current share price. Such a deal would provide about US$1.3 billion of cash, sufficient to bring net debt to about 3.8 times the US$367 million of Ebitda that analysts forecast for the 2016 fiscal year.

Whether it would stay that way is another matter. You have to go back all the way to 2013 to find a point when Noble's trailing 12-month free cash flow was in positive territory, suggesting that cash alone won't be enough to solve all the issues with the business.

Still, having a couple of generous sugar daddies has worked well for Olam International, its fellow commodities trader, and Noble has been actively primping itself for strategic suitors in recent months. If a down-on-her-luck commodities trading giant can't find love with a Chinese SOE in these times, what hope is there for the rest of us?

BLOOMBERG


  • This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
A version of this article appeared in the print edition of The Straits Times on February 15, 2017, with the headline 'Noble and Sinochem - two businesses made for each other'. Print Edition | Subscribe