Noble Group

CITI RESEARCH on 14 Aug 2012

THE worst of Noble's negative earnings revisions cycle, which started in November 2011, should now be over post Q2 2012 results.

For Noble, negative earnings revisions at about 25 per cent (versus peak earnings levels in Q3 2011) have reached about two-thirds of the earnings revisions seen during the Global Financial Crisis (GFC).

This has marked stock-price bottoms historically, with Noble performing strongly in 2009. While there has been poor interest in the stock in H1 2012, Noble showing good execution for another quarter (ie, three well-managed quarters in FY12 post its very weak Q3 2011 in November 2011) will likely help generate greater interest in the stock, given global financial crisis-like valuations on the stock currently. We rate Noble "buy (1)" with a S$1.68 per share target price. Noble is a strong proxy for investors looking to participate in volume growth in the commodities marketplace with a steady rise in margins expected as its investments in selected assets and upstream projects come on-stream and achieve optimal scale. With the recently concluded Gloucester Coal/Yancoal Australia coal merger, Noble has significantly enhanced cash levels that will enable it to take advantage of weaker asset prices if the macro situation turns tougher; its US gas/power assets were acquired at attractive prices during the GFC. Investors will also focus on Noble's ability to grow coal offtake volumes from the enlarged Australian entity, as it targets a rise in saleable production to 25-30 million tonnes by CY2016, from a pro forma 12.8 million tonnes in CY2011.

Our S$1.68 target price is based on the Gordon Growth valuation framework which values Noble at a price/book multiple of 1.8x using a long-term growth assumption of 3.0 per cent, sustainable ROE of 16 per cent and cost of equity of 10.2 per cent. We believe the stock's catalyst could come from:

• Noble clearly demonstrating an ability to lift its long-term margins as its assets and investments start contributing meaningfully and
• an ability to perform capital recycling on some of its assets that would help enhance its ROE profile.

BUY