Muddy Waters, the investment research firm helmed by Carson Block, just announced a new short thesis — Singaporean commodities trading firm, Noble Group Limited.
The stock fell 6% on Wednesday after Muddy Waters published an 14 page report alleging that Noble “exist solely to borrow and burn cash” — a classic accounting fraud.
Noble depends on its income statement to survive. When a company borrows and burns cash as consistently as Noble does, it needs to generate EBITDA for its lenders, and net income for its equity investors (a company’s ability to issue equity is comforting to lenders). For a company such as Noble, with significant amounts of Levels 2 and 3 fair value assets and an ever-expanding balance sheet, EBITDA and net income can be relatively easy to produce.
Muddy Waters’ report specifically took on Noble’s management, stating that the company’s business is too complicated and opaque for them to manage, especially in any way that’s transparent enough for investors to understand.
If “adversity introduces a man to himself”, in the public company context, it also introduces management to investors. Management’s actions taken on the eve of Noble reporting its first quarterly loss since being public, give a clear view of how they operate. Through a highly questionable acquisition followed by a series of suspicious transactions, Noble reduced its first reported quarterly loss by approximately two-thirds. The reported gain was equivalent to roughly 10% of Noble’s 2011 net income. In this report, we present the details of these transactions. After amassing this information, the truly disturbing aspect of Noble is that it has over 12,000 contracts — i.e., a lot of opportunities to do similar things again, and again.
Now, the last time Muddy Waters took on a Singapore listed trading firm, Olam, the country’s state investment firm, Temasek, bailed Olam out. That can happen when you play in Singapore.