Yesterday, Noble closed at $1.055 – its highest close since 28 May – after increasing another 2.4%, taking its total gains in the last four days to 8.8%. While Noble’s rally coincides with that of a commodity rally in Singapore, news of a fire in Brazil’s Santos port that destroyed a sugar trader’s source of raw sugar shipments may have benefited Noble.

Fire in Brazil to benefit Noble?
Last Friday, a fire at Brazil's Port of Santos, the world's main source of raw sugar shipments,  destroyed six depots and ignited 180,000 tones of sugar, all belonging to Copersucar, the world's largest sugar trader. Copersucar is now looking for alternatives from suppliers including Noble, to help meet its obligations.

Hear what MER thinks
On this piece of news, Macquarie Equities Research (MER) issued a research note on 21 October 2013 analysing the impact of the fire on Noble’s share price.

Impact
- The sugar lost to the fire is less material than the loss of Copersucar's main port capacity. According to the company, Copersucar accounted for 22% of Brazil's sugar and ethanol market in 2011-12, and 10% of the world free trade sugar market. In 2011-12, for example, it sold 6.9m tons of sugar, with 5.1m of those for export.

- One estimate cited in the press indicated it could take 6 months to repair the port facilities, which would take us into the start of next year's harvest. On balance, MER thinks this should increase the strategic value of Noble's port access at Santos.

- An area of concern however is what happens to domestic trucking rates. Should Copersucar look to increase its domestic sales, it could pressure Brazil's trucking fleet, which is already capacity constrained. Noble's sugar operations are more rail-dependent, but its grains operations do depend on truck transport.

- In the past, CEO Yusuf Alireza indicated he is looking for ways to leverage Noble's strengths in port access in exchange for help on its weak inland grains logistics. Last Friday's events would seem to raise the value of the former, but potentially exacerbate the latter. 

Action and recommendation
- The impact of the Santos port fire to Noble looks mixed to MER. The good news is that Noble's port capacity was untouched and sugar prices have some additional tailwind. MER can see the market focusing on this aspect in the short term. The bad news is that ensuing inland logistical disruption could impact Noble in its grains operations.

- MER will have to see how Noble's local management trades through all these issues. Here, MER would note that Noble now has a very seasoned team in Brazil.

- MER continues to await evidence of a sustainable ROE recovery that would make them more positive on Noble shares, which MER thinks are not very cheap, trading at 1.1x PB, excluding perpetual capital securities. Noble reports third quarter results on 5th November.

- MER has a Neutral rating on Noble Group, and a 12-month target price of $1.00.

Source: Macquarie Research - 23 Oct 2013