Recovery priced in
▊ Noble’s FY13 core net profit of US$354m (-20% yoy) was 15% above our full-year forecast and 10% above consensus. The positive variance stems from higher-than-expected gross margins and lower-than-expected depreciation. Overall, the results were encouraging as bottom-up initiatives to cut costs and improve efficiencies are starting to bear fruit. We lift our FY14-15 core EPS by 1-11% for stronger margins and introduce FY16 numbers. However, at 1.1x CY14 P/BV (prev. 10x CY15 P/E), to which our target price is now pegged (change in valuation basis to align with its peer, Olam), we think that a recovery has already been priced in. We keep our Hold rating and would re-visit the stock on better Agriculture showing.
FY13 results: improvements gained momentum
FY13 results make for an encouraging read. On the back of improving operations, Noble achieved four consecutive quarters of improvement in operating income. The group raked in a revenue of US$97.9bn (+4% yoy), on the back of a 4% yoy increase in tonnage. Thanks to margins expansion in its Energy business, Noble achieved a gross margin of 1.5%, which beat our expectation of 1.4%. Core net profit dropped 20% yoy as it was affected by losses in Agriculture. However, this division started to turn around in 2H as its Brazilian sugar mills started to ramp up production.
Energy remains the star
Energy continued to be the star division, recording impressive gross margins of 2.1% for 2013 (+30bp yoy), which led to 16% yoy growth in operating profit. Agriculture recorded operating losses of US$83m in 2013 (2012: US$180m perating profit) due to continued headwinds. However, we witnessed a turnaround in 2H as the division swung back into the black. We expect Agriculture to turn around in 2014 as its sugar mills ramp up. Noble’s diversification efforts from ferrous to non-ferrous metals had a mixed impact on Metals, Minerals and Ore (MMO). While tonnage and revenue were secured, operating income fell 6% yoy due to longer-term offtake contracts.
Recovery priced in
While the results are encouraging, we believe that a recovery has already been priced in, with the stock trading at 1.1x CY14 P/BV vs. minimal excess over its CoE.
Publish date: 24/02/14