Noble Group - DBS Research 2017-05-31: Low Visibility

NOBLE GROUP LIMITED CGP.SI

Noble Group - Low Visibility

Uncertain impact from downgrade in credit rating to CCC+/Caa1 by S&P and Moody’s.
Outcome of strategic review unclear at this stage.
Suspending coverage given low visibility.

We think that Noble Group (Noble) will be able to refinance its upcoming borrowing base facility in June, contrary to the view of some market participants.
However, we are suspending coverage on Noble given uncertainty over the outcome of the group’s strategic review, and the impact from the recent credit rating downgrades, as well as risks that it continues to report losses into 2018. These factors make it difficult to anticipate the potential outcomes for Noble.

Some market participants have expressed doubt over Noble's ability to secure sufficient credit facilities to remain a going concern. However, in our view, as long as CIC remains a shareholder, which may provide some hope for Noble's bankers that a key backer will provide support in the worst-case scenario, Noble should be able to refinance its credit facilities, albeit smaller in size and with higher borrowing costs.
In addition, by lending on a secured inventory basis, we believe the various banks should have sufficient collateral to continue backing Noble.

Given the negative sentiment surrounding Noble at the moment, a potential investment by a strategic partner may provide confidence to investors and bankers about the strength of its business model and value of its assets.
However, given Noble’s low share price, there remains some risks that a strategic investor may offer unfavourable terms, which may dilute existing shareholdings in the near term.

As we are suspending coverage on Noble, we are unable to provide a current valuation or recommendation.

The key risk to our negative view is that Noble secures attractive valuations for its assets and/or delivers better-than-expected profits/cashflows.

In previous episodes where Standard & Poor's (S&P) and Moody’s downgraded Noble to below investment grade, we believe its counterparties, while being more cautious, continued to do business with the group and any major impact was mainly confined to higher borrowing costs for its unsecured facilities.
With S&P and Moody’s decision to cut Noble’s credit rating to CCC+/Caa1 (with a negative outlook), there is uncertainty whether counter parties may materially curtail their business activities with Noble in fear that Noble may be unable to fulfil its contractual obligations in 12-24 months' time.
However, to date, based on recent press reports, Noble had informed its employees in an internal memo that there should be minimal impact given the group has already been operating within a constrained environment.

Noble has announced that it is undertaking a strategic review with the assistance of Moelis & Co and Morgan Stanley. At this stage, it is uncertain what options Noble is reviewing.
In our view, this may involve the sale or partial sale of assets as well as investment in Noble by a strategic investor to provide confidence over the value of Noble’s assets and business model.
However, given Noble’s low share price, a potential strategic investor's terms for giving it a boost may not be favourable for existing shareholders and may result in a near-term equity dilution.

We have suspended our coverage on Noble given the difficulty in quantifying the impact, if any, from the recent downgrade in credit rating by S&P and Moody’s, and uncertainty over the outcome of the group's strategic review, as well as risk that losses continue into 2018.
Our previous recommendation was HOLD with a TP of S$0.94.

Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2017-05-31

DBS Vickers SGX Stock Analyst Report NOT RATED Maintain HOLD 99998 Same 99998