Noble losses may continue due to inability to hedge price risks in coal business, says DBS

SINGAPORE (BLOOMBERG) - Noble Group's losses could continue as the commodity trader may be unable to hedge price risks in its coal business effectively, according to DBS Group Holdings, which cut its share price target by about 60 per cent.

On Tuesday (May 16), the former blue-chip stock fell as much 5.1 per cent to 56 Singapore cents when the Singapore markets opened, before recovering to trade 1.7 per cent higher at 60 cents at 9:44am. The recovery follows a three-day 54 per cent slump in the shares that's been accompanied by a rout in the company's bonds.

A change in the structure of the coal market, a flattening of the forward oil curve and higher borrowing costs could delay the company's return to profitability, DBS analyst Mervin Song wrote in a report on Friday. The bank slashed its target to S$0.94 from S$2.30, while maintaining a hold rating.

Noble said last Thursday it will take at least a year to return to profit after posting its worst quarterly loss since 2015, and blamed the result on wrong-way bets on coal because of price distortions caused by hedge funds. It's the latest in a string of setbacks for Noble, once the largest commodity trader in Asia, which has been selling assets and cutting costs to bolster its finances after years marked by credit-rating downgrades and a share-price collapse.

"There is risk that losses may continue due to the inability to effectively hedge the price risk in its coal business, and still negative operating cashflows," Mr Song wrote, suggesting that Noble's return to profitability may be delayed. "There are questions surrounding Noble's ability to secure sufficient liquidity from its key banks."

Noble posted a net loss of US$129 million in the three months to March from a profit of US$40.5 million a year earlier. That's the biggest loss since the final quarter of 2015, when coal was also partly to blame. Founder Richard Elman told investors he hoped for a return to profitability by 2018-19 in a statement that announced he was stepping down as chairman.

"It will be a long, hard slog with ups and downs along the way, until we regain profitability, a goal that we are most likely to achieve in the financial year 2018-19," Mr Elman said. "I live under no illusion that this remains the likely timescale, however well we continue to execute our plans."

The appointment of Mr Paul Brough to replace Mr Elman as chairman could signal that the company may enter into financial restructuring soon as he specialises in the area, said Ms Annisa Lee, Nomura Holdings' head of Asia ex-Japan flow credit analysis in Hong Kong.

Noble declined to comment on restructuring speculation, according to its external press adviser Bell Pottinger. Mr Elman said on Thursday that Mr Brough will be in charge of reviewing "strategic alternatives".

While the net loss was disappointing, what is more damaging to investor confidence is the lack of guidance on the disruptions to the spot coal market, which has been dogging the company's trades, said Ms Lorraine Tan, an analyst at Morningstar Asia. "We think this could further put off lenders to Noble, and we anticipate even higher debt costs if the company needs to raise more capital, which we believe is likely," she said.