Noble has been on a downtrend since it was suspended from Argentina’s Grains Register because of an undisclosed amount of false invoices and potential use of third-party accounts. The news broke on 29 January and in a short span of nine days, its share price fell 4.8% even though the STI only slipped 0.1%.

Bunge to offer insight to Noble’s earnings?
US agribusiness and food company, Bunge, announced a US$599 million loss last Thursday, compared to a profit of US$254 million profit a year ago. The main contribution to the disappointing results came from Brazilian sugar. Bunge had goodwill write-downs of $327 million in the sugar and bioenergy segment. In addition, sales from that business segment posted a 28% decline in sales.

This could potentially impact Noble earnings, which has an exposure to Brazilian sugar.

In a research report dated 17 January, Macquarie Equities Research ("MER") cuts its rating on Noble to Neutral and lowered its 12-month price target to S$1.30 from S$1.40, implying a 9.2% upside from the closing price of $1.19 on 8 February. Below are some excerpts from the report.

Noble’s ROE path to recovery pushed out to 2Q13.
3Q12 saw another break in Noble’s ROE recovery story, as it reported only a mid-single-digit annualized result. MER thinks the return path to mid-teens ROE has been pushed out. Post further review, MER now believes 2Q13 will mark the turning point when Agri division recovers and costs are curtailed. These will have to be the drivers, as a weak coal pricing environment will act as a headwind through 2013.

Agri earnings uplift buoyed by increase in origination volumes and sugar contribution.
MER’s commodities team expects S. American seaborne oilseeds and grains supply to increase 12% starting in 2Q13. This should boost volumes, given that most of Noble’s origination assets are in S. America.

The sugar price is expected to normalise back to US23-24cts/lb as speculators cover short positions. Coupled with higher crushing volumes, MER should see better earnings from Brazilian sugar mills in 2Q13.

Total cost savings of c.US$100m from restructuring and cheaper refinancing to materialise in 2Q13.
While Noble has no control over weather or tail-risk events from trading, they do have discretion over expenses. In this aspect, they have guided for c.US$100m in annual cost savings, starting in 2Q13.

Weak thermal coal prices to dampen recovery.
MER’s commodities team downgraded 2013 thermal coal price forecast by 10% to US$90/T due to muted power demand from China. This does not bode well for Noble’s coal off-take agreements, some of which are linked to price, MER believes.

MER’s action and recommendation
MER is Underweight the Agribusiness sector from a country strategy perspective and believes a better entry point for Noble could open up post their 4Q12 report. Fundamentally, MER expects better results from 2Q13.

Source: Macquarie Research - 13 Feb 2013