Monday, July 15, 2013

Noble Group : Waiting For Clearer Indicators (UOBKH)

Noble Group
Share Price S$0.915
Target Price S$0.920

Waiting For Clearer Indicators
The worst for earnings could be over but the turning point remains unclear with margin under pressure from weak demand and large soybean, sugar cane and cotton supplies. New capacities could provide buffer and new investment opportunities could lead to more offtake from miners. Upgrade to HOLD as share price has corrected since our downgrade in May 13. Target price: S$0.92. Entry price: S$0.83.

What’s New
• We upgraded Noble to HOLD from SELL after share price corrected by 18% since our downgrade. The correction in share price could have factored in Noble’s underperformance in 2013. However, we have yet to see a turning point to spur the share price performance.

• Business is still challenging for agricultural division with lower prices and challenges to move the volume out from producing countries. Hopefully, these could be somehow mitigated by the new sugar mills in Brazil and about three new soybean crushing plants in Brazil, Ukraine and South Africa coming on-stream.

• Cost control on track. Cost control initiatives to reduce expenses by US$100m are on track but more significant impact to be reflected only in 2014 earnings.

Stock Impact
• Timing issues. Recall, 1Q13 losses were partly due to the timing of crushing/mills operations in Argentina and Brazil. With the record soybean and sugar cane harvest in South America, the contribution in 2Q13 should have improved over 1Q13 though it is hard to quantify this. Better contribution from the agricultural division should come only in 2H13 as port congestion in Brazil is yet to be resolved, making it difficult to ship out the cargo to destinations.

• New capacities to boost volume. The new sugar and soybean crushing plants coming on stream in 2013 are likely to boost the processing volume. But the high volume of supplies could translate into lower margins. China’s crushing utilisation rate is likely to be low with weaker demand for soybean meals and back-to-back margin remains volatile and in negative territory.

• Focus on growing energy segment. This segment (60-80% of operating income) has seen the strongest growth (3-year CAGR: 37.5%) among the three divisions and will be the focus going forward. Noble’s key strength is its stronghold in coal originations and it is now moving into trading/marketing of oil and power in the US. Growth for this segment to come from: a) new marketing agreement with coal producers in Mongolia and Africa, b) opportunities to get new offtake agreement with miners through funding arrangement given that mining industry is facing funding crunch, and c) its latest participation in the shale gas industry, providing one-stop solutions on logistics, exports, marketing and storage. This division contributed 78% of operating income in 2012 ad was up from 34% in 2010 through a series of inorganic growth.

• Metals, minerals & ores (MMO) below potential and to get more focus to boost contribution. This segment contributes the least or about 8-10% of total group operating income. Over the years, this division sees the least M&A deals. Noble reckon that this division has yet to reach its full potential and will get more focus going forward. The products under this division are most sensitive to global economic growth. Given the weak growth outlook, demand for MMO might not see good demand growth. However, Noble sees good growth opportunity for this division from potential investment into miners in exchange for offtake.

• Cost and capex control. Noble continues to focus on cost control with at least US$100m reduction in costs coming from reduction in financing cost and operating cost. The major cost impact will be felt in 2014. Noble guided for a capex of US$500m over the next two years vs US$824m spent in 2012.

Earnings Revision/Risk
• We slashed our earnings estimates post 1Q13 results on the weak agricultural division and consensus has started to trim expectation. Our 2013-15 estimates are now 30% below consensus vs 40% when we cut our estimates.

• Key risks in our view are defaults by customers and suppliers on price volatility, impairment of assets, liquidity contraction and extreme weather conditions.

• Upgrade to HOLD after the recent price weakness and see improvement in earnings. Noble is now trading below its book value of US$0.81/share (or S$1.02/share) as at 31 Mar 13 and is at its historical low. But further upgrades will have to depend on the sustainability of its earnings improvement. Target price of S$0.92 is based on a 30% discount to its long-term mean PE of 15.3x. Entry price: S$0.83.

Share Price Catalysts
• South American soybean exports.
• Argentina and China crushing margins.
• Sugar and ethanol prices in Brazil.
• Global thermal coal demand.

Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian research
Publish date: 15/07/13

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