Noble trading the lowest in six months
The following day after Noble Group reported its first quarter earnings, its shares had dropped by the most in six months after trading down -6.3% to an intra-day low of $1.045. While it recovered some of these losses to close at $1.095 (-1.8% on the day), its last traded share price of $1.07 is a six month low and a 4% loss post results, compared to the STI’s 0.8% gain over the same one week period.

The commodity trading company, Asia’s largest by sales, had reported a 63% decline in its 1Q13 net income to US$41.3 million, weighed down by a US$66.6 million operating loss at its agricultural unit.

While Noble’s 1Q13 earnings figures were expected to decline, its US$41.3mn number was significantly lower than Bloomberg’s estimates US$188mn.

MER sees next quarterly result as stock price catalyst
In its most recent research report released yesterday, MER stated that while Noble’s headline price-to-book valuation multiple looks cheap, they would need to see what a ‘good’ quarter for the agriculture division looks like before turning positive.

Noble’s 1Q13 earnings miss of 33% was largely driven by a surprisingly large loss in its Agri division. MER had expected a soft quarter, but the size of the shortfall raises questions around this division’s underlying cost base. Given the limited disclosure, it is difficult to isolate the loss’ underlying drivers.

The trend in Agri is likely “better” but the quantum is hard to estimate. With better soybean and sugar cane supply in Latin America from 2Q13, 1Q13 should represent a low in terms of margins. MER forecasts a rebound to profitability as of 2Q13, but have little confidence in the absolute amount.

MER’s estimates imply a rebound to 12.5% ROE by 2014, versus the average 8.5% trailing twelve months return-on-equity (ROE) Noble delivered over the last six quarters. This falls short of Noble’s 20% target. Should MER gain confidence in the “20% scenario” then there would be plenty of upside, as it would imply a fair P/BV of ~ 2.3x, versus today’s 1.14x. MER will wait and see if ROE can pick up under better industry conditions in 2Q13.

Earnings and target price revision. MER cut its 12-month target price on Noble from $1.30 to $1.15 to reflect reduced capital expenditure estimates to be in line with Noble’s strategy of returning to its asset light roots.

MER sees Noble’s next quarterly results as one of the potential price catalysts, along with Latin American soybean exports, Argentina and China crushing margins, sugar and ethanol prices and thermal coal demand.

Noble’s CEO optimistic on agricultural segment
In the meanwhile, Noble’s CEO Yusuf Alireza has pointed out following the release of Noble’s earnings that “Noble continues to build out its sugar milling capacity in line with earlier guidance, while we expect our agricultural segment to gain momentum as we move into the main harvest periods.”

Source: Macquarie Research - 23 May 2013