Noble Group - Oversold, despite resiliency (DBSVickers)

BUY S$1.33 STI : 2,675.16

Price Target : 12-Month S$ 1.70 (Prev S$ 2.60)

Reason for Report : Company update, forecast and TP revisions

Potential Catalyst: Consistent earnings growth delivery in 2H11

DBSV vs Consensus: Higher than consensus in FY11F-13F due to higher volume expectations

• FY11-13F EPS adjusted by -4% to +11% on revised commodity price and FX rate assumptions

• 2008 GFC hit Noble’s earnings when commodity prices plunged; but volumes were resilient

• Now, more diversified business and tighter commodity supply mean less vulnerability

• Revised TP of S$1.70 after imputing higher ERP (equity risk premium) – Retain BUY call

Volume growth in last downturn. During the 2008/09 downturn, Noble’s CY09 core earnings fell by 26% y-o-y due to the drop in commodity prices and freight rates, whereas volumes grew by 27%. Assuming a replay of the global financial crisis (GFC), we believe Noble should still be able to deliver volume growth on the back of investments made since 2008, in particular sugar and soybean assets in South America. We project volume CAGR of 14% over FY10-13F.

Noble’s profitability is now less vulnerable in a potential downturn, given more businesses with greater demand resiliency. Combined contribution from Agriculture (food demand), Noble Petro fuel storage (volume play) and mandated ethanol demand segments should make up 67% of FY12F gross profits versus only 32% from Agriculture in 2008. We also do not see a sudden collapse in prices this time around, given tighter supplies (i.e. dry US weather reducing soybean production; infrastructure constraints restricting coal and iron ore volumes, FY12F iron ore supply deficit).

FY11-13F EPS revised by -4% to +11%, after imputing changes in commodity prices and FX rates. We have also raised our equity risk premium (ERP) to 10.5% from 6.5% and updated beta to 1.6 from 1.5 to reflect the current macro conditions. TP is reduced to S$1.70 (i.e. implying 10.4x FY12 PE and 1.6x FY12 PBV) from S$2.60.

Buy call maintained on 28% upside to TP. Upcoming catalysts include consistent earnings growth delivery in 2H11, driven by investments in sugar and soybeans over the last few years. Risks to our call include further deterioration in risk appetite leading in turn to a further de-rating to -1 standard deviation PBV of 0.8x (equating to S$0.90 per share).