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ENERGY & OFFSHORE | Marianne Estioco, Singapore
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More pain ahead for Noble after staggering 2015 loss

Revenue growth will be increasingly difficult.

After booking a whopping US$1.6 billion net loss in 2015, analysts warn that 2016 will prove to be another difficult year for beleaguered Noble Group.

“Given the sputtering economic outlook globally and the still-bearish outlook for commodities in 1H16, chances are that we could see more near-term pain before things get better,” wrote OCBC Investment Research analyst Carey Wong in a report.

The main drag on Noble’s earnings came from its Metals & Mining segment, which saw earnings before interest tax loss surge to US$175m in the fourth quarter, bringing its full-year EBIT loss to US$229m.

And although Noble managed to strengthen its balance sheet through the proposed disposal of its 49% stake in Noble Agri, investor sentiment continues to be fragile after the group’s rating was downgraded below investment grade by Moody’s and S&P.

“Given continued weakness in various commodity markets, we believe the ability to grow earnings is increasingly getting harder,” DBS analyst Mervin Song said. 

Song said that Noble should roll out a number of measures in order to overcome investor concerns. These measures include a partial or full sale of its associates and/or Level 3 assets, as well as clinching a strategic investor in Noble itself or one of its divisions to provide reassurance over its business model. 

“However, ultimately Noble has to demonstrate a sustained improvement in its free cash flow generation and earnings growth to support any re-rating. Nevertheless, we still expect volume growth largely from Noble picking up market share from its smaller competitors and expansion into the energy and power markets,” Song noted.  

Other analysts warned that Noble Group will grapple with higher funding costs this year, but highlighted that steeper credit costs should be manageable thanks to the group's improved liquidity position.

Morgan Stanley analysts Charles Spencer and Mean Phil Chong said that with Noble's net cash of US$1.6 billion, coupled with Noble Agri sale proceeds of US$750 million, should support confidence in short-term bank refinancing of around US$2.2bn at its current level.

"[Noble] significantly improved key its short-term assets liquidity position to US$4bn (from just US$2.7bn in 3Q15), which should help support confidence in the bank's refinancing, which may require increased collateral," they added.

In terms of Noble's bonds—which have been trading at distressed levels since the group was downgraded to junk status by Moody's and S&P—Barclays analyst Jit Ming Tan said that investors are too bearish on Noble Group's bonds.

"We continue to view bond valuations as being excessively negative and believe valuations will improve as Noble continues to strengthen its liquidity and leverage positions," Tan said.

However, Tan cautioned that investors are likely to remain doubtful of the group's prospects despite the Noble's vastly improved financials. 

"In our view, a lack of conviction by other investors to put on new long positions means that there is no sustained upward pressure on bond valuations. We believe this situation is likely to persist until Noble convincingly addresses concerns over its ability to refinance upcoming debt maturities in 2Q16, as we think it will," Tan said.

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