Noble Group’s shares have jumped an impressive 8.1% in the last two days, way significantly outperforming the +0.8% gain on the STI. Its rally has come on the back of the commodity rally and also reports that Noble Group is in talks to potentially form a joint venture around its agriculture unit with a group that include China’s Cofco Corp (Reuters).

The company posted an SGX announcement on Tuesday 4 March that it was indeed engaged in discussions with a consortium on a JV for its agriculture business, although there is no certainty as to whether the JV will be established. Noble also took the opportunity to address this piece of news in an annual analyst meeting held on 5 March to cover their 2013 results. Macquarie Equities Research (MER) who was there at the meeting, analysed the impact of the news in a research note issued yesterday.

Impact
In line with its SGX statement, Noble confirmed that talks with potential JV partners for its Agri business were ongoing.

But management didn't talk about who the potential partners might be (the Reuters article suggested Chinese agribusiness Cofco), nor the scope of the talks. It did talk about the importance of China as a key Agri destination market though.

Noble also didn't specify any timeframes beyond saying that that further news could be out "sooner rather than later." It also left the door open for a scenario whereby no deal ends up being consummated, which seems like a lower probability outcome to MER.

Noble indicated that it was not looking to sell the Agri division outright, but was interested in becoming more asset light in the area, in line with it's revised strategy under CEO Yusuf Alireza (Agri accounts for roughly half of Noble's fixed assets but only 20% of its volumes, made a loss in 2013, and has been a persistent drag on group return-on-equity).

When asked about the US$1 billion valuation for the Agri business cited in a recent Reuters article, management said it did not know where the number came from, referring to it as "nonsense".

At the same time, management did not indicate what the Agri division's current (or past) book value would be on a standalone, de-consolidated basis. (The segmental balance sheet figures published in Noble's annual reports show a high degree of variability and depends on how Noble allocates the group's across its three divisions). It did say that any future announcement would be "transparent" in terms of valuation metrics though.


MER’s action and recommendation
Whilst the origin of the leak on the Agri restructuring will never be known, MER’s sense is that 'where there's smoke there's fire.' Noble's sale of its Australian upstream coal interests (Gloucester) to Yanzhou Coal in 2012 could well be the template: In that deal, it received cash as well as an attractive offtake agreement and associate stake in a much larger scale coal mining business (Yancoal). Noble secured an attractive valuation then, and was able to de-consolidate a low return-on-equity asset in Gloucester, which has consistently logged losses since 2012.
 
MER has a Neutral rating on Noble Group and a 12-month target price of $0.90.

Source: Macquarie Research - 6 Mar 2014