SG: Noble Group (NOBL SP) Materials | In a position of strength

Price Target:  $1.42 | BUY | Upside 27%

Slightly below expectations. Noble reported a net profit of US$194.8m for 2Q12, padded by gains from the Yancoal-Gloucester deal and helped by a deferred tax credit. Excluding these factors, we estimate recurring net profit would be around US$110m. However, we believe profit would have been better if not for the wet weather delay of its Brazilian sugar mills.

Yancoal pre-tax gain came in at US$100.3m. This was lower than the US$200m estimated earlier. However the actual net gain may be higher, given that there was a US$35.5m deferred tax credit for the period associated with this deal. Excluding the net US$49.9m non-recurring "profit on supply chain assets" and normalizing the tax would derive a net profit figure around US$110m or a yoy decline of 20%.

Agricultural segment was affected by wet weather. This segment showed a significant 69% yoy decline in gross profit, largely due to the wet weather delay of Noble’s Brazilian sugar mills. Q2-Q4 is normally the production period and management now expects the mills to compensate for the lost processing in 2H12. The energy segment fared better, with gross profit up 37% yoy largely on continued expansion of the Oil, Gas and Power division.

Receipt of cash over next six months. Although book value/ share remained at US77 cents/ share this quarter, the key benefit of the Yancoal-Gloucester deal is the unlocking of cash for possible asset purchases during a possible downturn. Adjusted net gearing levels have come down from 48% to 40% this quarter on account of lower working capital. Receipt of cash over the next six months from this exercise and other minor divestments total approximately US$800m, which if taken into account would bring this figure down further to 23% (net gearing 73%).

Maintain BUY. We keep our estimates unchanged, with 2H12 profit expected to pick up with Brazilian sugar mill production. With substantial capital recycling in motion, Noble now has a balance sheet in a position of strength. Current share price reflects 1.15x P/B or 1.4x NTA, which we believe mitigates share price downside. We continue to use a book-value based TP of SGD1.42 (1.5x P/B, 1 standard deviation below 5-year mean). Maintain BUY.

Debt position looks comfortable relative to peers. The key benefit of the Yancoal-Gloucester deal is the unlocking of cash for possible asset purchases during a possible downturn. About US$800m is expected to be received over the next six months, mainly in the form of capital distribution and repayment of intercompany loan from Gloucester.

Adjusted net gearing stands at 40%, which will go down to 23% taking into account these cash receipt, a figure which appears comfortable relative to peers. We also note most of the debt is longer-tenured, essentially sacrificing higher interest cost for assurance of funding.

Source: Maybank Kim Eng Research - 14 August 2012