Below expectations. Noble reported an underwhelming set of 3Q12 results, which were below market expectations, though not quite as unexpected as the 3Q11 losses. Recurring net profit came in at SGD67.1m, and full-year numbers are now unlikely to hit earlier consensus estimates. More disappointing, tonnage was also down yoy, which was a first in recent history.

Anticipated bumper gains at Agricultural segment did not come through. Given the wet weather delay at its Brazilian sugar mills in Q2, we had earlier expected 2H12 to compensate for the loss processing. However, the bumper gains at this segment did not materialize (gross profit up 3% yoy). Management did not explicitly address this and we think it could be partly due to poor sugar pricing during the period. Noble also did not benefit from the US droughts as expected, because the harvest at its origination in South America was sub-optimal.

Energy division seasonal weakness. Results at this division was below 2012 quarterly run-rate, however this is likely to be seasonal in nature, due to the summer weather. Yoy showed a healthy 42% increase.

Lower risk, lower profit. We reiterate that the higher commodity price volatility is unlikely to benefit commodity traders in general. The dramatic reversal in prices of corn and soybean was alluded to as a factor for poor agricultural profit, as the Group choose to take less risk. While we like its stronger-than-peers balance sheet position, this appears to reflect a more conservative position by the management team, along with its low VAR this quarter of 0.36%. This could imply lesser-than-expected profit in the next few quarters, which is still the focus of the market.

Downgrade to HOLD. Bearing in mind the likely profit volatility of commodity traders in the current environment, we had earlier used a P/B valuation methodology. We therefore maintain our TP of SGD1.42, pegged to 1.5x P/B, (one-standard deviation below historical mean). Downgrade from BUY to HOLD on valuation grounds as well as risk of further earnings disappointment.

Source: Maybank Kim Eng Research - 09 Nov 2012