Noble Group - Strong turnaround expected in 3Q12 on reversal of losses and Brazil’s sugar harvest.
(NOBL SP/BUY/S$1.29/Target: S$1.52)
FY12F PE (x): 12.2
FY13F PE (x): 10.2
Turnaround expected on doubling of operating income. We expect Noble Group to report a significant turnaround to a net profit of US$153m in 3Q12 from an US$18m loss in 3Q11. As a recap, Noble was hit in 3Q11 by defaults by US cotton farmers, carbon credits losses as well as low Brazilian sugar processing volumes from unfavourable weather and poor yields. For the quarter, we forecast operating income to more than double to US$526m, comprising contributions of US$151m (+121%) from the Agriculture division, US$330m (+113%) from Energy and US$45m (+133%) from Minerals, Metals and Ores (MMO). Cotton default losses unlikely to repeat. The US Department of Agriculture reported that US export volumes are only marginally up yoy as the drought continues. But the key point is that we do not expect a repeat of losses as prices have stabilised and forward commitments are likely to have been reduced.
Maintain BUY and target price at S$1.52, pegged at 1.6x P/B (excluding perpetuals), derived from a dividend discount model (required rate: 10%, terminal growth 2.3%). We believe Noble’s stock will be supported by the continued earnings recovery and strengthening balance sheet. Noble received US$355m in 3Q12 and expects to receive another US$360m by Jan 13 as a result of the Gloucester-Yancoal deal. With lower net gearing (about 0.9x vs >1x prior 2012) and a stronger balance sheet, Noble is in good position to capitalise on acquisition opportunities. Noble recently announced its participation in a consortium which had bid for mining and materials company Arrium, although the bid was rejected by the target.
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