The Straits Times Index rallied more than 1.8% yesterday to close at 3251.78, with Noble Group (Noble) gaining more than 2.1%, outperforming the benchmark index. Closing at $0.96, Noble is trading at its highest closing price since 5 July 2013.

Macquarie Equity Research (MER) issued a report on Noble on 13 September. Here are some excerpts from the report.

The right man. Mr. Alireza recently met investors at MER’s ASEAN conference and hosted a sell side lunch. He is committed to returning Noble to its supply chain roots with a focus on Asian destination markets whilst staying diversified across Energy, Agri, and Metals. MER liked his candid assessment of Noble‟s strengths and weaknesses, and thoughts on “bartering” the former to address the latter. But investors looking for a quick realization of Mr Alireza‟s 20% Return On Equity (ROE) target (no timeframe given) will be disappointed, in MER’s view.
 
Still not the right time. Consensus estimates are calling for a ~50% Earnings Per Share (EPS) rebound in 2014 off of 2013’s depressed base. MER expect a lower 32%, which reflects the following:
 
 Agri: no quick fix. MER expect a return to profitability by 4Q13, but with only low single-digit US$ per ton margins in 2014: MER’s team sees a moderate rise in 2014E sugar prices. MER thinks logistical issues in Brazilian grains will take time to iron out, and see oversupply in the Chinese soybean crushing industry persisting for several years.
 
Energy: risk of mean reversion. Over the last 3 quarters, Energy margins of ~US$10 per ton have come in 40% above those seen in the last 3 years (~US$7) despite weak coal prices. MER cannot determine if the drivers here are permanent. MER’s regression based estimates reflect some mean reversion as of 2014E (US$8.5 per ton).
 
Given lower than usual visibility and a gap to consensus, MER changed its price target methodology from Discounted Cash Flow (DCF) to Price/Book Value. MER’s revised target of S$0.90 (-22% vs. S$1.15 before) implies a year end P/BV of 0.93x, excluding capital securities. MER cut its medium term EPS by 12% (2013-17E), and DCF fair value drops from S$1.15 to S$1.10.
 
Action and recommendation 
 
Midstream names are rallying alongside indicators like the Baltic Dry Index (whose rally MER’s commodities team sees as overdone). But MER think earnings are still set to disappoint due to overcapacity and weak commodity prices. Evidence of a sustainable ROE recovery would make MER more positive on Noble shares.
 
Therefore, MER has a Neutral rating on Noble with a 12 month price target of S$0.90 based on a Price to Book methodology.

Source: Macquarie Research - 20 Sep 2013