All four of Noble’s main business segments performed remarkably well in FY07. This is especially true for the Logistics segment, which saw its revenue up by 148% YoY to reach US$1.3 billion and gross profit up by 414% YoY to reach US$241 million in FY07. The three commodity segments: Agriculture, Energy, and Metals, Minerals & Ores (“MMO”), also did extremely well. Revenue for the Agriculture segment was up 76% YoY, Energy business segment saw its revenue up by 60% YoY, and MMO segment’s revenue improved by 60% YoY.
Our view on Noble for FY08 … We do not think the perceived slow down to the US economy will have much adverse effect on Noble’s profitability. Although we agree that Noble’s topline growth may slow in FY08 (but definitely not negative growth) should the US enter into a recession, we still think that the Group will do better in FY08 as compared to FY07. The growing Asia-Pacific region, with its growing demand for industrial/energy commodities (such as coal and iron ore) and agricultural commodities (such as grains: soybean, wheat, etc), should lend substantial support in driving growth, albeit slower, to Noble’s FY08 results.
… and beyond. We expect Noble to further acquire more value-accretive, marginenhancing assets along the existing supply chain that it is already participating in. We also do not rule out Noble entering into the supply chain businesses of new commodities/products other than those it is already in. Noble’s core businesses have seen tremendous transformation since 1995 – it has successfully added new business lines to its income stream, from fleet management, to agricultural products like sugar, cocoa, cotton, and soybean, and to energy products such as coal, carbon credits, and ethanol. As such, Noble’s topline grew from US$595 million in 1995 to US$23.5 billion in 2007.
Reiterate BUY. We think Noble looks very attractive. In terms of price swings we agree that Noble is volatile. However, it remains fundamentally sound due to its integrated business model, diverse income streams, strong balance sheet, and its wide reach on a global scale in bringing the supplies (much needed commodities) to where strong demand is. Our fair value estimate of S$2.60 is derived from our dividend discount model (“DDM”) which translates to a FY09 P/E of 14.5x and P/B of 2.4x.
Segmental Details
Strong results from all business segments. Noble’s commodity business segments: agriculture, Energy, and MMO posted strong full year results in FY07. On average, all three segments saw their revenue grew by more than 60% YoY. Gross profit was up for Agriculture and MMO segments by 66% YoY and 210% YoY respectively. The Energy segments saw its gross profit down by 28% YoY despite the jump in revenue and tonnage volume. The lower results were due to lesser contribution from the Clean Fuels and Carbon Credits divisions. However, this was offset by better results from the Coal and Coke division.
The Logistics segment saw the strongest growth in both revenue and gross profit. In particular, the segment’s gross margin improved to 19% (from 9% in FY06) due mainly to its Chartering division, which saw increased tonnage volumes as a result of increased commodity shipments for Noble’s internal needs and for third party clients. Higher freight prices also led to better profitability and margins for the division.
Overall margins remain low, reflective of Noble’s conservative business model in not taking directional positions on commodity prices. Although we saw strong revenue growth across all business segments, Noble’s gross and net margins remain low, at 3.5% and 1.1% respectively. This is typical of any commodity supply chain company and it goes to show that Noble does not take on risky directional bets on commodity prices. Noble business model is simple: to source (diverse commodities) from low cost production regions and market them to where demands are high. In between, Noble will seek to extract values along various segments of the supply chain. It aims to generate income through the following strategy: one-third from fixed assets, one-third from fee income, and one-third from trading arbitrage.
Outlook and Forecast
It is not just about demands. It is also about infrastructures and access to supplies. Although Noble’s business model is to bring the supplies where the demand is, we do not think that Noble’s growth is driven purely by demand. The supply side of the equation is equally important; one cannot ignore the fact that to have access to supplies, basic infrastructures and the means to transport commodities to their desired destinations are vital.
Noble’s success hinges on it being extensively integrated and having margin-enhancing assets at key points of the supply chain on a global scale. Beside the advantage of having strong origination presence in many parts of the world, Noble has, over time, invested in many earnings-accretive assets at various points along the supply chain – such as mines, ports, bulk vessels, warehousing facilities, and processing plants. It is one thing to have access to supplies, it is yet another to be able to bring the supplies to where demand is and along the way, extract values from these raw materials. As such, these assets, coupled with strong sourcing capabilities globally, enable Noble to be sufficiently nimble in bringing supplies where demand is. Finally, we also like Noble’s relatively low gearing (net debt-to-equity of 1.2x) in its balance sheet and hence, lower financial costs.
Outlook for Noble’s Agriculture segment – long term bullish. We expect demand for grains (especially soybean) to remain strong, with China and India as the main growth drivers. The appetite for soy products from both countries will continue to be strong over the next few years. In China, due to extensive investments in soybean crushing facilities in recent years, especially along coastal cities, we see demand for imported soybean to remain firm. Noble, which incidentally controls about 10% of the soybean crushing plants in China (it owns 4 soybean crushing facilities in China), should see another good year in 2008. In India, projected demand for protein meal and vegetable oil should also see Noble doing well there (Noble runs 3 soybean crushing plants in India).
Noble’s US$140 million acquisition of the UNP sugar mill in Brazil in 2007 spells another milestone in securing earnings enhancing assets along the agricultural supply chain. Brazil accounts for 40% of world sugar exports and is a low cost producer. Noble’s entry into this largely fragmented Brazilian sugar industry will not only improve its position as a major player in sugar processing, it also provides Noble with a unique arbitrage opportunity: exporting physical sugar when the price environment is buoyant; convert to ethanol (margin-enhancing) and sell in domestic market when sugar price is low.
Overall, with the various earnings accretive assets in place, we are optimistic about this segment in general over the long term.
Outlook for MMO segment – 2008 should be a good year, but demand for industrial commodities expects to soften gradually by 2009. Demand for industrial commodities, especially iron ore, will remain buoyant in 2008. Growing demand for steel due to a construction boom in China and India should keep the iron ore market buoyant. China will continue to be one of the major importers of iron ore for its steel industry. Noble, being one of the largest suppliers of iron ore to China, stands to benefit from the strong demand. However, we expect Chinese steel output to drop gradually beyond 2008 as the exports of steel products decline. The export of steel products from China in January this year fell 5.4% YoY, and we are anticipating relatively flat steel exports this year. Domestic steel consumption will be the main driver for the import of iron ore in FY08 and should lend support in terms of growth in tonnage volume for Noble’s Iron Ore division (part of MMO segment).
Overall, we expect Noble’s MMO segment to perform well in FY08, with FY09 and beyond seeing gradual decline in terms of tonnage growth.
Outlook for Energy segment – thermal coal the main driver for growth. We expect Noble’s Clean Fuel and Carbon Credits divisions to register relatively flat growth in FY08. The main growth driver will come from the Coal and Coke division with demand for energy in the Asia Pacific region driving imports for thermal coal. Noble’s investments in coal assets in 2007, such as the expansion of Donaldson coal operations and the increased investment in Gloucester Coal, will enable it to be well positioned to gain on the region (Asia Pacific) long term demand for coal.
Outlook for Logistics segment – freight rates to remain firm in 2008 but we expect softer pricing environment towards the end of the year. Tonnage growth will remain firm, reflecting the overall strong demand for commodities. We also expect developing countries to source supplies from further distance due to disruptive weather conditions at nearby sources as well as tightening of exports at the origin markets (such as India’s tightening of iron ore export through the increase of export duty). These factors should lend support to the freight rates in the near term and as such, we expect freight prices to remain firm. Although we see softer freight prices beyond 2008, we do not think that the rates will fall to the low level of 2005/06 (as indicated by the Baltic Dry Index).
Valuation and Recommendation
Conviction BUY, fair value at S$2.60. The fair value estimate of S$2.60 is derived at using the three-stage DDM model and translates to a FY09 P/E of 14.5x and a FY09 P/B of 2.4x. We have also adjusted our assumptions to reflect the generally weaker market sentiment. We believe that Noble’s fundamentals are sound despite the current tumultuous market condition and investors with an appetite for volatility may want to accumulate on this counter upon price weaknesses.
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Interesting stuff
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