OCBC Research: Noble Group - 9 Apr 2008

Sell-down on dilution fears overdone

Shares overly battered on dilution woes. Noble Group Ltd (Noble) made the headlines recently as its shares tumbled following the announcement of a share placement. The new shares, priced at S$2.09 each, will enlarge Noble’s share capital by around 3.83%. However, dilution fears were exaggerated amid a jittery market, driving the stock down by over 6% intraday. We met up with management recently, and were reassured of its financing position as well as its business outlook. It remains optimistic on the outlook for commodities, and is confident that it will not need to conduct any more equity fund raising activities in the near term.

Commodities rally spells a strong 1Q08. In essence, 1Q08 saw strong demand for hard commodities, setting the stage for Noble’s buoyant operating environment. Robust demand for commodities such as coal and iron ore propelled the group’s revenue growth in 1Q08, and management is confident that its rapid growth momentum witnessed last year will continue to power ahead. Present high commodities prices bear testimony to the world’s insatiable appetite for commodities. For instance, spot prices of China’s iron ore imports more than doubled from a year ago and peaked at its record high in March 2008.

Improved margins from willowing competition? The current situation of sky-high commodities prices presents a double-edged sword. On one hand, Noble will need more working capital to fund its business operations, but on the other hand, this could potentially eliminate competition from the smaller players with limited funding capabilities. While we do not expect Noble to acquire any such ailing companies, easing competition among commodities supply chain players could lift its profit margins.

A note of caution. As the commodities party continues, we note a potential stumbling block brought about by political risks. Some governments have already stepped in with measures to dampen exports in light of the reported shortage of food supplies. Argentina, for instance, has increased its export taxes on certain agricultural products, leading farmers there to go on strike.
Such uncertainties could pose inherent risks to global supply chain managers, and Noble will not be spared. Nevertheless, we believe that its geographically diversified operations could mitigate some of this risk. We retain our BUY rating on Noble, but lower our fair value estimate to S$2.54 to account for post-placement dilution.