Noble

Kim Eng on 29 Feb 2012

In line with expectations. Noble’s fourth-quarter earnings returned to positive territory in a set of eagerly anticipated results. Though the results were only in line with consensus estimates, we expect this to spur a recovery in investor confidence. Net profit for 4Q11 was US$105.7m (US$72.2m excluding profit on supply chain assets). FY11 net profit showed a 29% decline to US$431.3m.

Below usual quarterly run-rate. Profitability for the quarter was below its previous run-rate, as we had expected, largely due to unfavourable macroeconomic factors. The decline in VaR (Value at Risk) since August last year to a historical low of 0.35% in December implied that Noble went into a more cautious mode in the fourth quarter, which was a factor in the lower profitability. With commodity prices exhibiting some stability, this should revert to normal over the next few quarters.

Tonnage growth. Full-year tonnage grew by 18% YoY, implying growth in overall business activities. The 10% YoY drop in overall gross profitability could be traced to the agriculture segment, which declined 37% YoY. Other than the well-documented issues with cotton farmers in the US, soybean crush margins in China remained poor, in line with what competitors like Wilmar have reported. For the sugar division, management shared that the integration of its newly acquired sugar mills in Brazil was smooth. Utilised capacity should increase 30% next year on expanded planting.

Book value increased. As a function of the caution exercised in 4Q11, working capital reversed itself from US$3.5b in December 2010 to US$3.2b, which resulted in adjusted net gearing falling from 50% to 45%. We believe the balance sheet strength would provide a solid platform for Noble to continue investment growth in 2012. Book value per share increased from US67cents to US71cents (estimated US74cents if the Yancoal deal is concluded).

Maintain Buy. With a possible agri business spinoff in the pipeline, a sharp recovery in earnings (which are leveraged to macro factors) and a return in investor confidence, Noble represents an asymmetric bet to a market recovery in 2012. The current price represents 1.45x P/BV, still one standard deviation below its historical mean. We maintain our Buy recommendation with a target price of $1.90 (pegged at 13x FY12).