Share Price S$0.915
Target Price S$0.92
2Q13: Below Expectations; Too Difficult To Call
Noble reported a net profit of US$62.8m for 2Q13 and US$104.1m for 1H13. The results were below expectation. 2Q13 results were again dragged by unexpected losses from the agriculture division due to unresolved logistics problems in Brazil and low sugar prices. Earnings forecasts were adjusted down again and we foresee consensus downgrading earnings. Maintain HOLD. Target price: S$0.92. Entry price: S$0.83.
• Results were below expectations. Noble reported another disappointing quarter due mainly to the losses from its agriculture division. For 1H13, net profit of US$104.1m was well below our and consensus expectations. Although the division was expected to deliver better performance, low sugar prices might have capped its performance. We are now expecting the agricultural division to post only a marginal profit for the year.
• Agriculture - Another unexpected loss. The agriculture divsion posted a US$53.7m loss, affected by: a) low sugar prices and higher harvest and capacities, b) the grain business ramping up new capacity was a drag on earnings, and c) negative crush margin in China. Again, the loss caught the market by surprise as the port congestion in Brazil situation had improved in 2Q13 vs 1Q13.
• New offtake and new recruits in energy contributed higher volume. The energy division reported a higher operating income in 2Q13 on higher revenue of US$16.5b (+12.8% qoq, -0.2% yoy). Revenue was boosted by higher tonnage (+22.1% qoq, +6.1% yoy) as Noble continued to source more coal, especially from the additional offtake agreements with South Africa and added new hires to its oil & gas business. For 1H13, this was the only division to deliver a growth (+8.6% yoy) in operating income despite lower revenue (-5.0% yoy) as operating margin for 1H13 was higher at 2.13% vs 1H12’s 2.02%.
• MMO margins expanded on new products. Operating margin expanded the most to 1.2% in 2Q13 from 0.3% in 1Q13 and 0.8% in 2Q12. This lead to an 85.6% yoy and a more-than-double qoq jump in operating profit to US$55.5m for 2Q13. The improvement was driven by expansion into new products and new offtake agreements in new geographies.
• Net gearing was up marginally to 50.3% as at end-Jun 13 from 48.8% as at end-12. Net debt increased by US$272m to support the higher working capital required for the strong harvest in South America. Noble has been embarking on debt refinancing to reduce its interest cost. Management highlighted that interest cost in 2H13 should show the benefits from all the refinancing. From 3Q13, management is guiding for an interest expense savings of about US$100m.
• Logistics problem could take a while to solve. The agriculture division’s performance in 2H13 may still be affected by the lower sugar selling prices and the logistics issue. Management mentioned that Noble is hit worst than peers because its current port is not able to cope with the rising volume. Management is looking into this to ensure the logistics issue can be solved to cater for the enlarging sugar operations in Brazil.
• The energy and MMO divisions could be supported by new offtake agreements. These two divisions are likely to be supported by the volume expansion from the new offtake and new geographies agreements. The impact was seen in the energy division’s performance in 1H13.
• We reduce or net profit estimate for 2013 by 6.8% to account for a lower operating margin from the agriculture division. We are now expecting EPS of 4.5 US cents, 6.9 US cents and 7.4 US cents for 2013, 2014 and 2015 respectively.
• Consensus net profit forecast could be too optimistic and hence, we expect a downgrade. Lower sugar prices could limit profit growth as the volumes increase for Noble’s sugar cane processing facilities in Brazil.
• Maintain HOLD. Noble is now trading below its book value of US$0.77/share (or S$0.96/share) as at 30 Jun 13. But further upgrades will have to depend on the better visibility and sustainability of its earnings improvement. Our target price of S$0.92 is based on 10.7x 2014F PE, a 30% discount to its long-term mean PE of 15.3x. Entry price is S$0.83.
Share Price Catalyst
• South American soybean exports.
• Crushing margins in Argentina and China.
• Sugar and ethanol prices in Brazil.
• Global thermal coal demand.
Publish date: 12/08/13