Noble share price has jumped more than 34% since the end of January this year, outperforming the STI’s 8.3% gain during the corresponding period. Closing at $1.28 yesterday (22 April), Noble is trading approximately 15.3% above its 50-day moving average of $1.11.
 
Macquarie Equities Research (MER) issued a report on Noble on 17 April, raising their target price to S$1.50 with an outperforming rating on the commodity firm. Here are some excerpts from the report.

MER upgrade their recommendation on Noble Group from Neutral to Outperform with a revised target price of S$1.50/share following the proposed 51% stake sale of its agriculture division (Noble Agri Limited, NAL) to COFCO. MER’s positive view is supported by a reduction in gearing and an improvement in ROE post completion of the deal (long stop date is 31st Dec 2014).

Given more information following the announcement, MER changed their valuation methodology from P/BV to SOTP, valuing NAL, Ex-NAL divisions and cash proceeds separately. MER has not revised their earnings estimates as the deal is still subject to regulatory approvals, but provide a pro forma model inside.
 
Risk reward clearly skewed to the upside
Weakest division sold at an attractive valuation. NAL is a highly geared (91%, 2013), low ROE (-10%) business, which will continue to return below its cost of equity in the medium term, MER thinks. Yet, Noble is set to receive 51% of 1.15x on NAL’s 2014 book value in cash, on MER’s estimates. MER sees this as a very good deal.

Deconsolidating NAL significantly reduces gearing. Upon completion of the deal, Noble’s net gearing (avg.14-16E) will drop significantly, by 70ppt (from 99% in 2013), and ROE will improve by 0.7ppt (from 7.7% in 2013) on account of higher interest income, offset by a lower contribution from the gradual recovery in NAL’s ROE MER expects in 2015/16E.

Scenario analysis on SOTP yields -5% to 41% upside. MER’s base case pro forma assumes no debt repayment or reinvestment. Upside risks include:

Debt repayment. Full use of cash to repay debt improves ROE by a further 1.2ppt from finance cost savings. Ex-NAL’s cost of equity should decrease too (lower levered beta). Depending on the amount repaid, MER sees a fair value range of S$1.50 to S$1.74/sh.

Reinvestment into ex-NAL. Noble has been securing more off-take agreements in Energy/Metals, Minerals and Ores through its partnerships with X2 and Sundance Resources. Depending on the reinvestment amount and returns, MER sees fair values in the range of S$1.50-S$1.77/sh.

Downside risk: Given low visibility, MER also stress-test their Energy Gross Profit / Tonne margins. MER’s base case (US$8.5) is close to historical average (US$8.8). A US$0.50 change in Gross Profit / Tonne would translate to a S$0.10 change in their valuation.
 
Price catalyst

• 12-month price target: S$1.50 based on a Sum of Parts methodology.
• Catalyst: Noble reports 1Q14 results mid May.

 
Action and recommendation
MER sees value emerging from the deal and would accumulate at current prices.

Source: Macquarie Research - 23 Apr 2014