Noble Group - Small impact from proposed ban on Indonesian coal exports (DBSVickers)

BUY S$1.48 STI : 2,774.33

Price Target : 12-Month S$ 2.60

• Indonesia may ban coal exports of below 5,700 kcal by 2014

• Noble has an exclusive marketing agreement with Berau, whose coal is c.5,100-5,500 kcal

• Noble’s entire exposure to Indonesian coal in FY11F-14F is estimated at 4.8-5.1% of gross profit

• Impact would be offset by potentially higher global ASP from its Australian coal operations

Potential ban of coal exports below 5,700 kcal by 2014 BT today ran a report on a proposed ban on Indonesian coal exports with calorific value of less than 5,700 kcal that is

currently being drafted by the Ministry of Energy and Mineral Resources. The report stated that the new regulation is likely to be signed this month and would call for local processing of raw materials to upgrade the heating values or to blend it with

high-grade fuel by 2014. It is unclear whether this would apply retroactively to forward sales beyond 2014.

Noble has coal exposure in Indonesia Of the companies under the Supply Chain sector, Noble Group is involved in exporting c.15m MT of Indonesian coal and has a marketing agreement with Berau Coal (approx. c.10m MT this year, assumed to increase by 25% p.a.). Berau's coal has calorific value of 5,100-5,500 kcal, which falls below the minimum threshold. While Noble may have the capability of upgrading its Indonesian coal calorific value above 5,700 kcal, it is unclear whether its export destinations would seek alternatives due to the higher prices.

Worst cast scenario: 4.8-5.1% impact on gross profit Assuming 4% margin, we estimate that Noble's entire Indonesian coal exports account for c.10-11% of its Energy segment gross profit and c.4.8-5.1% of its FY11F-14F consolidated gross profit (not all coal exports are below 5,700 kcal). Hence, any potential impact would be small. However, we should also point out that the regulation would likewise reduce the global supply of thermal coal, which in turn would lift Noble's coal revenues elsewhere (i.e. Donaldson Coal). At worst, Noble should be able to shift its thermal coal outsourcing from Australia, although probably with slightly different coal specifications.

Maintain BUY, S$2.60 TP

We are leaving our forecasts, TP and rating unchanged, pending issuance and disclosure of details of the proposed regulation.