Published September 28, 2009

More investment value in Noble than Olam

By OH BOON PING

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SO the state-owned enterprises are on the hunt for value investments again. Just last week, China Investment Corp (CIC) took strategic stakes in Indonesia's Bumi Resources and commodity trader Noble Group, while PetroChina completed its buyout of Singapore Petroleum Company.

Singapore's Temasek Holdings also recently bought stakes in commodity firm Olam International and Brazil oil services firm San Antonio.

In all the cases, the intention seems clear: to diversify their portfolios by getting exposure to the resources industry.

What is curious, however, is the fact that Temasek which could have similarly bought into Noble, chose to park its money with its peer Olam instead.

Both are global supply chain managers. Olam is in the agriculture, food and logistics space, and Noble has interests in agriculture, logistics, chartering, metal and ores, coal and carbon credits.

The latter's assets range from Brazilian sugar mills to Australian iron ore to oilseed-processing facilities in China and India and its access to export markets is supported by port facilities it owns in South America.

It is precisely for this reason that CIC agreed to spend US$850 million, with a view to investing in 'infrastructure assets and supply-chain management related to agricultural commodities'.

And both stocks should similarly benefit from the growing middle-class consumption of food products, which will keep sales volume buoyant. All of which means, the diversification benefits from agricultural exposure should be similar for both Olam and Noble.

However, what makes Noble stand out is the fact that its exposure to the cyclical components - metals, minerals and ores, and energy - allows the stock to ride on the nascent economic recovery.

Since the onset of the financial crisis, undervalued assets have emerged, and both companies have been quick to use inorganic growth to support business expansion.

But Noble's stronger cash balance (US$748.5 million as at June 30, versus Olam's $266.2 million), means that the company generally has the resources to fund acquisitions without having to do a massive share issue that will dilute existing shareholding.

On this point, OCBC Investment noted that 'Noble's prudent balance sheet management has allowed it to fund acquisitions without needing to raise additional capital'. In contrast, 'its peer Olam has recently raised additional capital to fund inorganic expansion, at the expense of diluting existing shareholders' interests'.

Of course, Temasek had earlier pointed out, as its investment managing director David Heng said, that investment in Olam 'fits well with our investment theme of supporting emerging global champions'.

But from an investment standpoint, Noble's value proposition is certainly not inferior to Olam's, as seen from the diversity of its portfolio - and a stake in Noble does not even come at a substantial cost relative to Olam.

While it is true that Temasek paid US$303 million for 13.76 per cent of Olam - compared with CIC's US$850 million for 14.5 per cent of Noble - Noble's stock returns have generally outperformed Olam's. Therefore, it is conceivable that the returns per unit of dollar invested is higher for Noble than Olam.

And this brings us to the second point: the comparative valuations between the stocks. Prior to Temasek's investment in Olam in June, the stock traded at an average of $1.70, while Noble's price averaged $1.36.

And although Olam concentrates mainly on agricultural products, it generally trades at a far higher price-earnings ratio (PE) compared with Noble.

Higher return

'Noble is the only peer with a higher return on equity and yet lower price-to-book value ratio,' Kim Eng noted in an earlier report.

Given that Noble is substantially larger than Olam in terms of earnings per share, while cumulative returns are higher, its lower stock price suggests that a stake in Noble offers more value than a comparable one in Olam.

As at Friday, Noble's price-earnings multiple stood at 9.53 (versus Olam's 16.24) - which means there is still plenty of upside for CIC's Noble stake. Or perhaps at least more so compared with Temasek's stake in Olam.