Noble: Negatives are priced in, upgrade to NEUTRAL (DMG)

(NEUTRAL, S$1.20, TP S$1.20)

Following recent plunge in share price, valuations appear fair. Post results, Noble’s share price fell 25%. We believe its negatives (poor results, CEO resignation) have been priced in. Its lossmaking quarter is likely a one-off in our opinion, and currently, acting CEO Richard Elman (Noble’s founder and Chairman) is more than capable to steer Noble’s ship. Trading at 11x FY12 P/E, it is currently below its five year historical average of 14x, but is in-line with peers. We upgrade Noble to NEUTRAL with unchanged TP of S$1.20.

Loss making quarter likely a one-off. 3Q11 losses were due to (1) counterparty defaults from its cotton division, (2) poor sugar crop production resulting in low utilisation of mills that pressured margins, and (3) fall in carbon credit prices that caused unrealised mark to market losses. We do not expect subsequent quarters to be as badly affected. Cotton prices have been relatively stable the past four months. Sugar volume and utilisation is also expected to increase, while Noble’s exposure to carbon credits should be much smaller.

Proof of earnings quality and management succession are catalysts. Though we are of the view that the worst is over for Noble, we do not expect share price to perform in the near term. We believe that following Noble’s shocking results, investors will be looking out for evidence of recovery (in the form of good quarterly results) as well as more concrete plans on management succession before it deserves a re-rating.

Currently trading at 11x FY12 P/E, fairly valued. At 11x FY12 P/E, Noble is trading below its five year historical average of 14x, but in-line with its peer average of 10.7x. We do not expect a re-rating in the near term. Any potential share price re-rating is subject to performance in the upcoming results and more clarity on management succession.