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).

Rotary Engineering Ltd - Upgrade to BUY - Attractive entry point (OCBC)

Upgrade to BUY

Previous Rating: HOLD

Current Price: S$0.585

Fair Value: S$0.66

S$110m contracts win. Rotary Engineering (Rotary) recently announced it has secured S$110m worth of contracts between Jul and Sep 2011. The wins include a "multi-million contract" from Chang Chun Group, a Taiwan-based petrochemical company, to undertake construction of a chemical plant on Jurong Island. Besides the Chang Chun deal, the group has also won 10 other contracts in Singapore, including a S$13m EPC tankage project for a power plant project by Bangaloreheadquartered infrastructure company - GMR Group. Over the past few years, Rotary has been participating in a number of overseas projects, most notably in the Middle East region. With the recent wins, we believe that Rotary remains competitive in Singapore context even as it pursues global aspirations.

Mega-deals needed. Compared with average quarterly revenue of about S$155m (over the past eight quarters), we believe that Rotary will need to secure larger EPC contract in order to replenish its order-book meaningfully. We examined the group's order-book trend and noted that it has been trending downwards since 3Q09 (end-2Q11: S$757m; end-3Q09: S$1.4bn) when it won the US$745m contract from SATORP to build a refinery tank farm at Jubail, Saudi Arabia. For future mega-contracts, we believe they may emerge from the Middle East region (i.e. UAE and Saudi Arabia), where the level of oil and gas activities remains high and is relatively less affected by political unrest. In addition, Rotary could leverage on its successful execution of the SATORP project.

Start accumulating. Year-to-date, Rotary's share price has fallen by 43% compared to STI's 17% decline. We believe that the market is increasingly pricing in a recession and overly punishing the stock for its declining order book. Despite the decline, current order book (S$757m) would also still provide earning stability over the next 12 months. Beyond FY12, we believe its order-book should remain at S$700m-S$1b, of which a majority would come from Middle East projects. Its marketcap to order-book ratio at 0.53x (close to one standard deviation below its long-term average) is not excessive. Thus, we believe that the current price (at 6x PER and 1x PBR, also about one standard deviation below their respective averages over the past 5 years) is well-priced for upside. Long-term investors willing to accumulate the stock now will also receive 6% yield for bearing the risk, assuming the group continues to pay dividends at 40% earnings. Upgrade to BUY with fair value estimate unchanged at S$0.66. The key risks include worsening geopolitical risk across the Middle East region, a sharp cut in capex by oil companies and project execution risks.

United Envirotech Ltd - Growing its recurring income stream (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.295

Fair Value: S$0.53

Invests in another waste-water project. United Envirotech Limited (UEL) has acquired another waste-water treatment project in China; this after exercising a call option to acquire the entire equity interest of Tongji Environmental (China) Pte Ltd (Tongji) for RMB34.03m. Tongji is the holding company of Aton Environmental (Shenyang) Co, where the latter has a 30-year BOT (Build-Operate-Transfer) concession agreement with the municipal government to treat 50k m3 of wastewater daily. According to management, the treatment facilities are valued at RMB69m, and are also located in Xinmin city, Liaoning Province, which is in close proximity to the group's existing treatment plants.

Expand presence in Liaoning and recurring income streams. The project - the group's third investment in Liaoning Province - will allow it to not only expand its presence in the economically developed province, but also provide potential opportunities for future upgrading and recycling using the company's advanced membrane technology. In addition, UEL says that the move is also part of its business strategy to increase recurring income streams through the investment in water treatment projects. With the plant already running at 80% capacity, UEL expects to see income contribution from Oct; and we estimate that the plant should generate around S$0.3m in quarterly income for the group.

Funding via internal resources. UEL intends to fund the investment using internal resources - which in reality just amounts to a cash payment of RMB0.53m; this as the remaining RMB33.5m will be offset against an earlier loan of RMB30m made to Tongji in Aug 2010 and the cumulative interest of RMB3.5m. However, UEL adds that it would also take over some RMB35m of debt for the plant, mainly due to working capital requirements. But we believe this is unlikely to cause any strain on UEL's resources.

Still positive on China's wastewater industry. Management continues to remain upbeat about the growth prospects in China's wastewater industry and intends to invest in similar projects in economically developed provinces. And with the proceeds from the issue of US$113.8m worth of convertible bonds to KKR coming in some time in early Oct, management believes that it should provide the group with enough powder keg for more potential acquisitions for the next one year.

Maintain BUY with fair value estimate at S$0.53. But until we see a more sizable EPC project, we maintain our FY12 and FY13 estimates for now, as we have already assumed such contract wins in our assumptions. Hence our DCF-based fair value remains at S$0.53. Maintain BUY.