By OH BOON PING
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COMMODITIES supply chain player Noble Group recently reported an impressive set of full-year results that saw 2008 net income more than double to US$577 million on a 54 per cent surge in revenue to US$36.1 billion.
A commendable set of results indeed considering that it was achieved amid a global turmoil that has taken a heavy toll on the earnings of listed companies. Not surprisingly, the company's share price jumped in an initial reaction to the buoyant results.
The results included significant contribution from one-off gains - to the tune of US$139.5 million - from the disposal of equity stakes in Australian mining companies. This accounted for about one-fifth of pre-tax profit. But even if we strip off the one-off gains, it is estimated that net income would have still risen by some four-fifths.
Respectable growth, no doubt, but the size of the profit surge is not likely to be repeated this year. Looking ahead, Noble also faces a challenging operating environment.
For example, much of 2008's growth was concentrated in the first half, with growth momentum tapering off in the second half as the economic crisis struck. In all likelihood, this points to slower business for the current year.
Take the energy segment. It saw fourth-quarter revenue drop 10 per cent to US$3.6 billion due to a 20 per cent drop in tonnage volume - a sign of slowing business growth compared with its strong performance in preceding quarters, which had pulled full-year revenue from the segment up by 66 per cent.
And this is all the more worrying since the energy segment now accounts for half of Noble's revenue and 42 per cent of its group tonnage. Any protracted slowdown in the sector will hit Noble's financial figures almost immediately.
A look at the MMO (metals, minerals and ore) segment paints a similar picture. For Q4, the segment revenue dropped 39 per cent to US$810.7 million due to a combination of lower prices in alumina/aluminium, steel and iron ore divisions as well as a slight reduction in tonnage volume levels.
The lower tonnage volume resulted from weakness in the steel sector, as well as the impact of reduced aluminium consumption in key industries such as construction and transportation.
To its credit, Noble's overall risk profile appears to be improving, despite a drought of letters of credit and more pronounced counterparty risks in the second half of 2008.
For example, its value at risk (VAR) - a risk measure - as a percentage of equity has remained fairly stable - hovering between 1.35 and 2.19 throughout the year. In November, it dipped slightly from 2.09 in October and reached 1.43 in December. This also points to a better risk-return trade-off.
Noble's active risk management framework has also helped it avoid major balance sheet writedowns even though commodity prices fell rapidly in the second half, according to DBS Vickers.
Meanwhile, Noble is making a takeover bid for Gloucester Coal, which is core to Noble's coal trading business in Australia. A successful completion could boost FY09-10 earnings by 15 to 16 per cent, some analysts reckoned.
In short, Noble still has plenty going for it in the horizon, but investors should think twice if they're hoping to make a quick buck from the stock.
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