Noble

Macquarie Research on 11 June 2012

Event
At 1.16x trailing PB (for 1Q12), Noble prices in -5% growth, assuming it can return to mid-teens ROE. Recent numbers have underwhelmed, but we think pencilling in a permanent EPS decline is too bearish. We see risk-reward skewed to the upside. 2Q12 should be subdued, but followed by a better 2H12, in our view.

Impact
Our Bull and Bear scenarios are broadly unchanged:
Bull Case, Fair Value of S$ 1.95 (+79%). Here, Noble returns to the ~20%-type ROEs it averaged over the last five years. This is a bull case because Noble’s business mix has changed and ROE has been falling, reaching a low of 8.5% in 2011.
Bear Case, Fair Value of S$0.90 (-17%). Noble’s ROE can no longer exceed its cost of equity, causing the shares to trade below book value.
Base Case: Mid-term ROE in the mid-teens. We see a path for Noble’s ROE to rise over the course of this year and into the future. Argentine crush margins are improving and the new sugar mills are slowly ramping. The merger of Gloucester Coal with Yancoal Australia alleviates that ROE drag. The thermal coal market is set to improve into year end. Noble can also control SAO expenses (includes bonuses). New leadership may yet shift Noble back to its more nimble, asset-light roots.
~1.2x PB has generally been a good entry point. Assuming we do not return to a GFC scenario, we see today’s valuation as compelling. It reminds us of the period post 3Q11’s surprise loss, except that recent results have been better and we can see a clearer path for future improvement.

Earnings and target price revision
We cut medium-term (2012-16E) EPS by 9% following a model review. Lower Agri estimates are offset by higher Energy and lower SAO expenses.
Our TP falls by less than earnings (to S$1.40 from S$1.44) as Noble’s working capital profile has been coming in better than expected. We also lower our capex estimates to better reflect the deconsolidation of Gloucester.

Price catalyst
12-month price target: S$1.40 based on a DCF methodology.
Catalyst: We think 2Q12 will be subdued, but see a better 2H12.

Action and recommendation
Midstream business models have not held up well over the last few quarters. We think the June quarter should remain subdued for all three Singapore peers. For Noble (and Olam) we see daylight from 3Q12. We believe Noble’s valuation prices in too gloomy a long-term scenario. Within the overall sector though, we are more positive on upstream than midstream names.