Dragged down by associates. Noble’s 3Q13 PATMI of USD23m (-70% YoY) disappointed, dragged down by a USD90m loss at the associates, which in turn was affected by a USD79m loss from Yancoal Australia. But even stripping out Yancoal Australia (due to FX loss and impairments on assets), the results were still slightly below market expectations as adjusted 9M13 net profit accounted for 60% of consensus forecasts. The energy sector, especially gas and power business surprised on the upside. The recovery in the agriculture sector and the transformation of the metal, mineral and ore (MMO) sector still have a long way to go given soft commodity prices and necessary transition period for MMO. Maintain HOLD and a TP SGD1.08, based on 0.9x FY04 BVPS.

Energy sector drives growth. We continue to believe the energy sector is the most visible growth driver. Despite the benign demand for coal, this sector still delivered a 14% YoY growth in revenue and 55% growth in gross profit. This was mainly driven by the gas and power business in North America and Europe. Noble added new senior management to the gas & power business in October and this could enhance the development of this sector. We look at around 13% gross annual profit growth in this sector for the next three years.

Agriculture and MMO remain difficult. As expected, the agriculture sector turned around from a loss to a gross profit of USD14m this quarter due to a recovery in sugar business in Brazil and soybean crushing in China. However we keep our view that soft commodity prices will curb a meaningful margin expansion in the short to medium term. MMO sector is still undergoing a transition period as volume and margins remain unpredictable. We may become more positive on this sector if India could reverse its iron ore export policy in the future.

Outlook remains unexciting. Noble’s volume and margin will remain unstable in our view. Similar loss from associate companies could repeat in the future. Admittedly, valuation looks cheap at 0.9x FY04 P/B. But we do not see a structural improvement in ROE, which is key for the stock to be re-rated. Maintain HOLD and TP SGD1.08.  

Source: Maybank Kim Eng Research - 13 Nov 2013