Kim Eng Research 27 Dec 2011
Unlocking value in Gloucester Coal
Proposed merger. Noble Group’s 64.5%-owned ASX-listed subsidiary,Gloucester Coal, has announced a merger with Yancoal, the Australianmining assets of Hong Kong-listed Yanzhou Coal Mining. Uponcompletion of the deal, Noble will hold an estimated 13.7% stake in theenlarged entity and Yanzhou, approximately 77% stake. Cutting a dealso close to the Christmas holiday season suggests to us that Noblemanagement is fully committed and firing on all cylinders.
Realising value upfront. Noble stands to book a one-off gain ofUS$200m from the transaction, lifting its NTA per share by about 5% toUS$0.69. Also, prior to the merger, Gloucester will conduct a capitaldistribution at A$3.20/share, with Noble receiving US$416m. With thecontingent value rights given to Gloucester’s minority shareholdersguaranteeing a price of A$6.96/share, this implies a value of A$10.20/share for Gloucester (A$2.1b), a 45% premium over its last traded price.
Freeing up cash at an opportune time. One major benefit of theproposed transaction is that it frees up cash for Noble at a time whenthere may be other distressed assets for sale. As part of the agreement,Yanzhou will bring in financing deals worth US$2.7b, enablingGloucester to return Noble’s shareholder loans and also accelerateprojects to optimize its massive coal reserves potential.
Off-take agreements will continue. Noble has off-take agreementswith Gloucester Coal, which will remain in place after the transaction.The group will thus continue to market Gloucester’s coal for a fee,which is, arguably, its core business. The enlarged entity will become aleading mining company on ASX and will have the ninth-largest coalreserves globally. This suggests more business for Noble, enhancing itsposition as a leading coal marketer globally.
A positive move in our opinion. Since its 3Q11 profit disappointment,Noble has been trading closer to book value. Hence, any move tocrystallise book value should be positive for the stock price. The deal issubjected to approvals by various authorities. Earnings impact is notquantifiable yet, but should be mildly positive. We have kept ourestimates and target price of $2.00 (13x FY13F). Maintain Buy.
Unlocking value in Gloucester Coal
Proposed merger. Noble Group’s 64.5%-owned ASX-listed subsidiary,Gloucester Coal, has announced a merger with Yancoal, the Australianmining assets of Hong Kong-listed Yanzhou Coal Mining. Uponcompletion of the deal, Noble will hold an estimated 13.7% stake in theenlarged entity and Yanzhou, approximately 77% stake. Cutting a dealso close to the Christmas holiday season suggests to us that Noblemanagement is fully committed and firing on all cylinders.
Realising value upfront. Noble stands to book a one-off gain ofUS$200m from the transaction, lifting its NTA per share by about 5% toUS$0.69. Also, prior to the merger, Gloucester will conduct a capitaldistribution at A$3.20/share, with Noble receiving US$416m. With thecontingent value rights given to Gloucester’s minority shareholdersguaranteeing a price of A$6.96/share, this implies a value of A$10.20/share for Gloucester (A$2.1b), a 45% premium over its last traded price.
Freeing up cash at an opportune time. One major benefit of theproposed transaction is that it frees up cash for Noble at a time whenthere may be other distressed assets for sale. As part of the agreement,Yanzhou will bring in financing deals worth US$2.7b, enablingGloucester to return Noble’s shareholder loans and also accelerateprojects to optimize its massive coal reserves potential.
Off-take agreements will continue. Noble has off-take agreementswith Gloucester Coal, which will remain in place after the transaction.The group will thus continue to market Gloucester’s coal for a fee,which is, arguably, its core business. The enlarged entity will become aleading mining company on ASX and will have the ninth-largest coalreserves globally. This suggests more business for Noble, enhancing itsposition as a leading coal marketer globally.
A positive move in our opinion. Since its 3Q11 profit disappointment,Noble has been trading closer to book value. Hence, any move tocrystallise book value should be positive for the stock price. The deal issubjected to approvals by various authorities. Earnings impact is notquantifiable yet, but should be mildly positive. We have kept ourestimates and target price of $2.00 (13x FY13F). Maintain Buy.
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