Citigroup: Noble Group - 11 Apr 2008

Buy: Confidence Corroborated in Call

* Follow-up from our investor call with Noble Group - Our confidence in Noble's ability to manage financial market conditions and capture the upside from the positive demand environment in hard and soft commodities remains unabated.

* Financing in place to deliver growth; no constraint - Noble management remain highly focused on working capital (the lifeblood) requirements for their growing business. Despite rising commodity prices, the cash conversion cycle has been reduced from 21 to 19 days with growth very much in place.

* Higher turnover of products and low inventory holdings add to flexibility - Noble has little necessity to hold more that 20-25 days inventory in its major commodities: iron ore, coking coal, coal and grain. Higher turnover in these markets enables greater flexibility and lower risk, in our opinion.

* Mixing the sources of finance is essential and to be expected - Noble will continue to optimize the balance sheet and the market to their advantage. Currently the debt capital market is a closed window, however bank facilities are available. Investors should expect the use of continued equity financing as part of a balance capital structure where deemed conservative and prudent.

* Higher margin calls and credit constraints are forcing greater rigor - CFO Steve Marzo commented that there are positives from the markets constraints in that the company is applying its talents more rigorously to ensure the most efficient use of funds is employed within the trading operations.

* Inelastic demand observed generically across end-markets - Feedback from management on whether price inflation could impact demand was reliant on the supply and demand dynamics of each industry. However, in the past two years, demand had proven to be inelastic to prices, and this trends continues.

* Thesis intact, no change to Buy recommendation - With markets tight, 2008 continues to look to be a strong year for earnings. The valuations of the hard assets within the business structure continue to increase, highlighting the value that we believe lies within Noble Group.

Company description

Noble Group operates a global supply chain supporting agricultural products (coffee, cocoa, sugar, soybeans and other grains), industrial materials (iron ore) and energy products (ethanol, clean oils, coal and coke). Founded in 1990, the company is headquartered in Hong Kong and has 70 offices in 35 countries serving over 4,000 customers. Major competitors include Cargill, Glencore and Bunge.

Investment strategy

We have a Buy / High Risk rating (1H) and S$2.39 target price on Noble Group shares. Noble is completing the build-out of its supply chain for agricultural grains from South America to China, including sourcing, loading, transportation, discharge, crushing (three plants in China, three in India) and distribution. The full-year impact of this strategic move will be seen in 2007. Furthermore, by 2007/08, Noble is likely to control over 1bn gallons of ethanol for US distribution (~14% market share). Our valuation inputs incorporate the relatively high risk nature of Noble's underlying businesses. Compared with supply chain managers that handle more stable, visible products, Noble's fair value price-to-book multiple is significantly lower. Nevertheless, this is already more than discounted by the market, in our view. Intrinsic visibility at the company level is improving significantly.

Valuation

Our S$2.39 price target is derived from our two-stage (high-growth and stable growth) Gordon Growth Model, which we believe should be used as the benchmark model for valuing regional supply chain managers (SCMs). Our high-growth period assumptions include: payout ratio of 25%, ROE of 19.7%; our stable-growth assumptions are: payout ratio of 80% and ROE of 12%. Our model uses cost of equity of 10.5%, risk-free rate of 4.5% and beta of 1.50. We use the output of our two-stage model to arrive at a valuation of FY07E 3.0x P/B, which gives a valuation of S$2.15. In addition to this we are adding the incremental value of the iron ore asset at S$0.12 and the coal assets at S$0.13. While Noble Group is inherently a relatively high risk stock, owing to poor industry visibility, our analysis implies that the market has overestimated the risks inherent in the underlying business. VaR is indicated by management to be around 2% of book equity.

Risks

We rate Noble Group shares as High Risk owing to poor industry visibility and the inherent risk in its trading business, although our quantitative risk model, which tracks 260-day share price volatility, would imply Low Risk. Noble Group's business model is exposed to a multitude of risks
including market, credit, liquidity, operational, legal and execution risks. Noble has incorporated a comprehensive risk framework to capture and minimize its exposure. However, it is inevitable that some residual price, credit and execution risk will remain, in our view. Investors must understand the inherent risks of the business and consider these against the underlying market valuations of the stock. Any of these risks could impede the shares from reaching our target price.

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.

Lim & Tan Securities: Noble Group - 7 Apr 2008

Annual Report Review

• We are confident, after reviewing Noble’s 2007 annual report, that its share price will likely test its 2007 peak of $2.50 in the not-too-distant future, and then surpass it.


• In the Q&A with senior management (including Vice Chairman Harindarpal Banga), we learned that the 2006 target to “double top and bottom line within 5 years” has been restated with 2007 as the base line, since net profit had already surged 92% and revenue by 71% in 2007.
  


• It was also good to refresh oneself on the strengths of the company:
  - Noble has 33 financiers, including all the top names in world banking (BoA, BoC, Citigroup, JP Morgan, DBS, HSBC, StanChart, Bank of Tokyo Mitsubishi, Credit Suisse, Deutsche Bank etc);
  - an impressive board of directors, with the latest addition being Prof Kenneth Courtis, who was MD and Vice Chairman of Goldman Sachs Asia from 1999-2006. And before him, David Eldon, who retired as Chairman of HK & Shanghai Banking Corp in 2005 after 37 years with the HSBC Group.
  - Dividend policy of a cash payout of 25% of net earnings. This is significant for a high-growth company like Noble. See Exhibit 1.
  - Management’s guiding principle of “only interested in being highly competitive throughout a cycle, and not bet on a permanent commodity super-cycle washing away sloppy mistakes or pricey acquisitions”.


• Two other points are also worth reiterating:
  i. Noble raised S$209 mln last week to invest in the business. Given 2007’s 20.6% ROE, that should generate additional $40 mln profit. Olam, on the other hand raised S$307 mln to pay down its borrowings. Assuming 6% interest cost, that will save $18 mln in interest expense.
  ii. Institutional investors were eager to invest in 100 mln new shares at a price ($2.09) that was close to what 3 directors paid for nearly 6 mln shares ($1.7755 to $2.05 for $1.97 average) on the open market.


• We therefore continue to prefer Noble over Olam.
  

Phillip Securities: Noble Group - 11 Mar 2008

Results synopsis. Noble Group Limited (“Noble” or the “Group”) posted a sterling full year results for FY07 (financial year ended 31 Dec 2007) with a record revenues of US$23.5 billion (up 71% YoY) and a net profit of US$258.5 million (up 92% YoY). The strong results came on the back of a record tonnage volume of 128.3 million tons, up by 37% YoY. A return on average shareholders’ equity of 20.6% was achieved for FY07 and Noble declared a final dividend of 2.48 US cents per share, representing a FY07 payout ratio of about 25%.

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.

We think that Noble’s global presence in key sources of important commodities such as coal, soybean, iron ore, and ethanol enables it to be sufficiently nimble in bringing the supplies to where the demand is or to where the price environment is attractive. Its strong balance sheet also affords it to be able to raise sufficient funds to invest in infrastructures such as ports, vessels, storage facilities, and processing plants – assets that are essentially margin-enhancing. We rate Noble a definite BUY and investors with an appetite for volatility may accumulate this counter should the price level becomes relatively attractive due to technical weaknesses.

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.

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.