Noble Group -
Price (21 Oct 13) S$1.01
Target price S$1.26
Positives from Fire at Brazil’s Copersucar
■ Fire at competitor facilities at Santos Port, Brazil – A fire which burnt through several warehouses and loaders belonging to Copersucar at Santos, Brazil on Friday destroyed 180k tons of sugar. Copersucar shipped about 5m tons of sugar for the 2011-12 season. Santos Port is a key hub for Brazil’s sugar exports, accounting c.50% of the country’s exports.
■ Expecting competing exporters to benefit – This event could benefit competing exporters as Copersucar looks towards alternatives to help it meet its obligations as logistics crimp sets in. The fire did not affect terminal operations at other exporters at Santos such as Noble, Cosan or San Martinho. Beyond logistical benefits, Noble’s sugar unit could also be helped by the rise (likely short-term though) in sugar prices.
■ Noble’s gestating sugar units have hampered earnings and valuations – Noble’s sugar unit have hampered its earnings and valuations as the business is still in a gestation phase currently. For 1H13, Noble’s agriculture unit had losses at U$120m vs. 1H12’s operating income of US$98m. To date, Noble has invested more than US$1.6bn in sugar mills in Brazil. Noble’s gestation phase in sugar will end in 2014 as the plantations around its mills fully mature, allowing it to have up to 17m tonnes of crush i.e. full utilization for the sugar season next year vs an estimated 14mt this year. We also believe that Noble’s sugar unit could be further aided by the Real’s depreciation, which helps Brazilian producers to become more competitive.
■ Re-rating catalyst in the works – Maintain Neutral. Noble is currently trading at 0.9x forward P/B, near the level seen during GFC. While it may be difficult to impute intent, we believe that recent investments in firms such as X2 (established by Mick Davis, Trevor Reid and other executives from Xstrata which merged with Glencore in May 2013) and Nyrstar help illustrate that Noble is now back to focusing on its core competence as a supply chain manager.
■ In part, Noble’s valuations have de-rated in recent years as its earnings have been hampered by the gestational state of its agriculture assets (e.g. Brazilian sugar mills). These events at Santos aside, FY13 remains challenging earnings-wise as it continues work on maturing its Brazilian sugar investments as well as its oilseeds crushing expansion in Ukraine, South Africa and Brazil. We believe key catalyst for Noble’s re-rating will depend on margin improvement as its agri unit improves on better utilization and sustained improvements in sugar prices.
Publish date: 21/10/13