After market hours yesterday, Noble reported 1Q earnings which fell 64% year on year. Macquarie Equities Research (MER) released a research note shortly after with a ‘Neutral’ rating and a 12-month price target of $1.30. MER’s price target is 16.6% higher than Noble’s closing price yesterday. Below are some excerpts from the research note.

MER expected Noble’s 1Q13 clean net income to be US$83m. However, the actual figure fell short by 31%, coming in at US$58m. MER believes that the market was expecting a result closer to US$100m. For 2013, MER sees at least mid-teens percentage downside pressure to consensus’ net income estimate.

Impact
The good news was that Energy delivered an outstanding result (50% ahead of MER’s estimate). Despite a weak industry backdrop, Noble was able to grow its coal volumes at higher margins. This division continues to impress quarter after quarter. 

But the Agri division tipped into a meaningful loss, which was in absolute terms as big as the profit MER had pencilled in for it. Agriculture was impacted by weak sugar prices and still low utilization of its mills, a lack of soybean availability in Argentina (as the new harvest impacts only in 2Q13), and logistical issues in Brazil which impacted soybean trade there (the harvest was in 1Q13).

Management indicated that conditions had improved as of 2Q13 (sugar milling has picked up as of April; Argentine farmers are willing sellers of their beans in 2Q13). But MER was unable to establish whether that would imply a quick return to profitability.

Interest expenses ratcheted up again in 1Q13 which was surprising given Noble's recent refinancing exercises. The explanation on the conference call was not that clear, but the CFO indicated that MER should see finance costs coming down again from 2Q13.  

Action and recommendation
Plain and simple, MER thinks Noble must demonstrate that its Agricultural division can deliver profitability. Without that, there is no visibility on Noble's path to its targeted medium term returns on equity (ROE) of 20%. As of 1Q13, Noble's trailing 12 month ROE has dropped to 8.3% from 10.4% (post perpetual capital securities payments). MER estimates Noble's cost of equity at 12.5%. With the stock trading on 1.3x price to book (excluding perpetual capital securities), the shares look more exposed from a valuation standpoint post 1Q13.

Source: Macquarie Research - 15 May 2013