Noble Group - Refocus on strong fundamentals (DBSVickers)

BUY S$1.44

Price Target : S$ 2.60

At a Glance

• 2Q11 profit of US$139.8m in line (+63% y-o-y)

• Profits boosted from higher ASP and volumes in Agriculture and Energy

• Lower margins and volumes in iron ore dragged results

• Focus on robust business fundamentals - Reiterate Buy, S$2.60 TP

Comment on Results

Noble reported 2Q11 earnings of US$139.8m (+63% y-o-y, -31% q-o-q) – in line with expectations on annualized basis. 2Q11 revenues rose 53% y-o-y (-2% q-o-q), on the back of strong contributions from Agriculture and Energy segments, higher volumes and ASP. Agriculture segment delivered strong operating income (+108% y-o-y) to US$165m, benefiting from a better business mix (larger contribution from higher value and margin products) and full contributions from Argentine crushing facility and operations in South America. Energy also recorded robust results with operating income rising 32% y-o-y (-22% q-o-q) with acquisitions in 2H10 (Northville and Sempra) contributing. Metals, Minerals and Ores (MMO) had a weak quarter however, with operating income falling 28% y-o-y (+35% q-o-q), dragged down by lower volumes in iron ore and softer margins due a weak freight market.

Noble’s balance sheet remains robust with net debt (less readily marketable inventories or RMI) to equity at 29.9%. Cash conversion cycle (adjusted for unrealized fair value gains/losses) was reported at 6 days, while net gearing (no adjustments in RMI) was calculated at 91%. The group had net debt of US$4,914m (excluding RMI) or US$1.624m (including RMI). Annualised return on opening equity eased to 17.3% from 20.5% in 1Q11.

Recommendation

We believe Noble’s strong 2Q11 results will be a catalyst for investors to re-focus on the robust fundamentals and attractive valuation of Noble rather than macro-economic risks. These include their exposure to resilient demand from emerging markets and profit contributions from investments in new businesses over the last 2 years. Trading on 10.8x FY11 PE with 3-year CAGR of 11%, we reiterate our Buy call and S$2.60 TP implying 81% upside.