OCBC Research: Noble Group - 27 Feb 2008

Truly ahead of the growth curve

Strong FY07 results. Noble Group Ltd (Noble) fired on all fronts and impressed with its FY07 results. Net profit surged 91.9% to US$258.1m on the back of a 70.7% growth in revenue to US$23.5b. Revenue grew across all its business segments (namely, Agriculture, Energy, Metals,
Minerals and Ores (MMO), Logistics and Corporate), led by higher commodity prices. Gross profit per metric ton of its commodities rose from US$5.2 per metric ton in 2006 to US$6.4 per metric ton in 2007. Fully diluted EPS climbed 83% to 9.96 US cents from 5.43 US cents in FY06.
To top it off, Noble has proposed a cash dividend of 2.48 US cents per ordinary share, as well as a 1-for-5 bonus issue.

Higher tonnage reflects strong demand for commodities. Noble’s growth was supported by robust demand for commodities globally. Its tonnage for its commodities businesses (Agriculture, Energy and MMO) rose 45%, while its logistics segment handled 24% more goods as compared to FY06. We expect the demand for soft commodities, especially from China and India, to sustain in 2008, and this will translate to a healthy operating environment for Noble in FY08.

Impact of a slowdown led by US recession. While the demand for soft commodities should remain firm in FY08, we are less bullish on the demand for hard commodities following fears of a US-led recession and its dampening effect on the global economy. We believe that the US could see a slowdown in construction activity in the event of a recession, while production activity in China may see slower growth post-Olympics in August 2008. These factors may dampen the demand for commodities like iron ore and steel. As such, we have forecast slower growth from the MMO segment to as compared to the Agriculture segment.

Still a sound investment. Nevertheless, Noble remains a sound investment with fundamentally sound prospects, and we are confident that its business model should be sustainable even in the event of an economic downturn due to its well-diversified earnings streams. Its strategy of vertical integration will allow it to extract higher profits in the longer term. We roll forward our valuation to FY08, but trim our valuation parameter to 15x (from 17x) to align it with the general de-rating of the market, leading us to derive a fair value estimate of S$2.64. Maintain BUY.