Kim Eng Research 27 Dec 2011
Unlocking value in Gloucester Coal
Proposed merger. Noble Group’s 64.5%-owned ASX-listed subsidiary, Gloucester Coal, has announced a merger with Yancoal, the Australian mining assets of Hong Kong-listed Yanzhou Coal Mining. Upon completion of the deal, Noble will hold an estimated 13.7% stake in the enlarged entity and Yanzhou, approximately 77% stake. Cutting a deal so close to the Christmas holiday season suggests to us that Noble management is fully committed and firing on all cylinders.
Realising value upfront. Noble stands to book a one-off gain of US$200m from the transaction, lifting its NTA per share by about 5% to US$0.69. Also, prior to the merger, Gloucester will conduct a capital distribution at A$3.20/share, with Noble receiving US$416m. With the contingent value rights given to Gloucester’s minority shareholders guaranteeing a price of A$6.96/share, this implies a value of A$10.20/ share for Gloucester (A$2.1b), a 45% premium over its last traded price.
Freeing up cash at an opportune time. One major benefit of the proposed transaction is that it frees up cash for Noble at a time when there may be other distressed assets for sale. As part of the agreement, Yanzhou will bring in financing deals worth US$2.7b, enabling Gloucester to return Noble’s shareholder loans and also accelerate projects to optimize its massive coal reserves potential.
Off-take agreements will continue. Noble has off-take agreements with Gloucester Coal, which will remain in place after the transaction. The group will thus continue to market Gloucester’s coal for a fee, which is, arguably, its core business. The enlarged entity will become a leading mining company on ASX and will have the ninth-largest coal reserves globally. This suggests more business for Noble, enhancing its position as a leading coal marketer globally.
A positive move in our opinion. Since its 3Q11 profit disappointment, Noble has been trading closer to book value. Hence, any move to crystallise book value should be positive for the stock price. The deal is subjected to approvals by various authorities. Earnings impact is not quantifiable yet, but should be mildly positive. We have kept our estimates and target price of $2.00 (13x FY13F). Maintain Buy.
Unlocking value in Gloucester Coal
Proposed merger. Noble Group’s 64.5%-owned ASX-listed subsidiary, Gloucester Coal, has announced a merger with Yancoal, the Australian mining assets of Hong Kong-listed Yanzhou Coal Mining. Upon completion of the deal, Noble will hold an estimated 13.7% stake in the enlarged entity and Yanzhou, approximately 77% stake. Cutting a deal so close to the Christmas holiday season suggests to us that Noble management is fully committed and firing on all cylinders.
Realising value upfront. Noble stands to book a one-off gain of US$200m from the transaction, lifting its NTA per share by about 5% to US$0.69. Also, prior to the merger, Gloucester will conduct a capital distribution at A$3.20/share, with Noble receiving US$416m. With the contingent value rights given to Gloucester’s minority shareholders guaranteeing a price of A$6.96/share, this implies a value of A$10.20/ share for Gloucester (A$2.1b), a 45% premium over its last traded price.
Freeing up cash at an opportune time. One major benefit of the proposed transaction is that it frees up cash for Noble at a time when there may be other distressed assets for sale. As part of the agreement, Yanzhou will bring in financing deals worth US$2.7b, enabling Gloucester to return Noble’s shareholder loans and also accelerate projects to optimize its massive coal reserves potential.
Off-take agreements will continue. Noble has off-take agreements with Gloucester Coal, which will remain in place after the transaction. The group will thus continue to market Gloucester’s coal for a fee, which is, arguably, its core business. The enlarged entity will become a leading mining company on ASX and will have the ninth-largest coal reserves globally. This suggests more business for Noble, enhancing its position as a leading coal marketer globally.
A positive move in our opinion. Since its 3Q11 profit disappointment, Noble has been trading closer to book value. Hence, any move to crystallise book value should be positive for the stock price. The deal is subjected to approvals by various authorities. Earnings impact is not quantifiable yet, but should be mildly positive. We have kept our estimates and target price of $2.00 (13x FY13F). Maintain Buy.
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