Noble: maintain BUY at targeted price (S$2.42 - S$2.46)
We revise down our earnings estimates for Noble to account in businesses such as iron ore, logistics, soybean crushing and a slower-than-expected ramp up in its new assets. We, however, maintain Noble as our top pick, based on comforting valuations and belief in its long-term re-rating story driven by new assets. Just announced Gloucester restructuring underlines turning newsflow and we believe Noble will make use of its strong cash and credit facilities to expand its asset base in energy/agriculture domain.
-Commodity price volatility implies balance sheet strength merits a premium. Also, strong demand prompts a favourable stance towards stocks leveraged to recovery.
- Not perfect yet, but turnaround is around the corner. Noble’s performance has been hurt on weak industrial demand, correction in freight markets, low crushing margins, China policy decisions, collapse of the Macarthur deal, and slow ramp-up in new businesses. However, we see operating metrics recovering over the next few months, which should lead the re-rating.
- Balance sheet even stronger, upside from coal valuation. Also, we believe the market is not appreciating the value of upstream coal assets, which can be a big driver once restructuring is in shape. On our estimates, Noble’s stake in all upstream assets is ~US$1.4bn, which is not yet fully captured in our and consensus valuations.
- 2Q10 a slow quarter for iron ore. Demand for iron ore weakened in 2Q10 as China’s steel mills cut production, a phenomenon which was reflected in the TSI Iron Ore index’s 26% tumble between Apr to Jun (exhibit 5). Lower iron ore trading activity could hurt Noble’s Metals, Minerals & Ores (MMO) segment’s performance. Nevertheless, we are not overly concerned over quarterly fluctuations as China’s iron ore purchases tend to be seasonal, as demonstrated by the Index’s 20% rebound over the last two weeks. Rather, we prefer to adopt a long term view, and expect China’s steel production to continue to buoy iron ore demand.
Source: Nomura/OCBC.
