Noble

Kim Eng on 6 Feb 2012

Stock price has recovered 17% since its unexpected 3Q11 loss. We believe Noble’s 4Q11 results, to be announced on 28 February, will be watched closely by the market. The difficulty in forecasting the group’s short-term earnings with certainty is most evident in the light of the loss, which took the entire market by surprise. We expect Noble to return to profitability with 4Q11 net profit of US$106m, but this would still be below profits of US$140-200m recorded in previous quarters.

Recapping the reasons for the third-quarter loss. Outside of the macro uncertainty and overall volatile market, there were three one-off events which resulted in the perfect storm: (1) US farmers defaulting on cotton contracts, (2) mark-to-market losses on carbon credits, and (3) depreciation of the Brazilian real. We believe that if any one of these events had not occurred, Noble would have been in positive territory.

Not this time. Noble was hit by unprecedented price volatility in the cotton markets in the first half of 2011, which made the defaults expensive. Since July, prices have stabilised. Carbon credit prices continued to decline in 4Q11, but management has limited new origination activities and further write-downs, if any, are likely to be limited. The Brazilian real, which had been the worst-performing major currency up to 3Q11, recovered strongly in 4Q11.

Macro factors still weak in 4Q. However, the macro factors which affected 3Q11 continued to linger into 4Q11. Soybean crushing margins in China, where Noble has four crushing plants, sank to new lows and remained in negative territory on soft demand. The sugarcane harvest in Brazil, where Noble has four sugarcane mills, remained weak due to adverse weather. On the positive side, the commodity demand outlook has improved since the turn of the year, which may herald a much more positive 2012 for Noble.

Reiterate Buy ahead of results. With a possible agri business spinoff in the pipeline, a sharp recovery in earnings leveraged to macro factors and a return in investor confidence, Noble represents an asymmetric bet on market recovery. The current price represents 1.3x FY12F P/BV, a strong floor to the share price, in our view. Maintain Buy with a target price of $1.85 (pegged to 13x FY12F), in line with its historical mean.