Noble Group

Kim Eng on 28 Mar 2013

A leaner Noble. We are positive on Noble’s new strategic direction to become a leaner version of its former self. We think the key drives over the next 12-24 months will remain 1) strengthening its balance sheet, 2)
reducing overhead costs and 3) refocusing on its role as an independent middleman between commodity producers and customers. We believe some of these will bear fruits in the near-term, which may provide an upward lift to earnings.

Cheaper financing is already evident. The pricing (3.8% yield-tomaturity) and takeup on Noble’s recent 5-year USD400m MTN issuance is evidence that the company’s healthier balance sheet and removal from the negative watchlist for its debt ratings will have immediate positive impact on bottomline. Debt cost averaged 7.3% last year. We estimate a 50 basis point reduction in average debt cost will increase our FY13F and FY14F estimated earnings by 5%/4%.

Overhead costs are already trending down. Including financing, Noble is aiming to reduce overhead expenses by USD100m. We believe this is a healthy streamlining exercise, given the years of massive expansion and should not be wrongly read as downsizing. We already see signs of SG&A cost discipline in recent quarters and expect even more bottomline impact for FY13.

Asset lighter strategy. We are positive on Noble emerging as a more focused and independent middleman from this exercise, which is its core competency in our view, and fills a competitive niche in light of Glencore’s move upstream to merge with Xstrata. In line with this strategy, we are likely to see more partnership deals like the recent JV with Wilmar for Palm Oil plantation in Papua. Similarly, it also increases
the likelihood of JVs with potential asset-owners such as its major shareholder China Investment Corp.

Maintain BUY. We see company-specific reasons to be positive on earnings outlook. Noble’s lower gearing should also find favor with investors. We adjust FY13-FY15F earnings up by 1-2%, with TP of SGD1.53 remaining pegged to 13x FY13F. Potential catalysts include divestment gains and announcement of JVs with strong partners.