Yesterday, Noble Group spiked another 4% to close at $1.315, its highest in nineteen months. The stock has risen 7.3% since announcing its first quarter 2014 (1Q14) results last Thursday. Macquarie Equities Research (MER) had highlighted in its research report released on 15 May 2014 that the results affirmed Noble Group as their top pick in the sector…

In MER’s opinion, Noble closed the Singapore commodity reporting season with a bang: The two divisions where it has competitive advantages keep delivering ahead of expectations, while the laggard Agriculture (Agri) division is in the process of being sold for an attractive valuation. MER thinks their Sum of Parts based price target is conservatively struck, and reaffirms Noble as their top pick in the sector.
 
Noble’s 1Q14E clean net income came in at US$181m, well ahead of MER’s USD56m expectation. Even on a theoretically normalized tax rate the result would have come in on the order of US$143m, i.e. a big beat.
 
Energy goes from strength to strength.MER’s model pencils in falling Energy margins in 2014 given the soggy industry backdrops, especially coal. But Noble has managed to sustain 2013’s trend of rising margins despite weak end market environments. 1Q14 came in at a record US$15.0/T, versus last year’s average of US$9.7/T (we model US$8.5/T for 2014 and pencilled in US$9.0/T for 1Q14). There were inevitable questions around sustainability on the analyst call, especially given the higher than usual Value At Risk (VAR) in the quarter, which was partially weather driven. Management did indicate that VAR had already come off in April, but MER’s sense is that Noble is also building underlying competitive advantages in Energy (e.g. coal blending) which give it more sustainable pricing power, even if not at 1Q14’s eye-popping levels.
 
Metals, Minerals and Ores division consistently surprising to the upside as well. Noble’s efforts at diversifying out of iron ore into other metals are now bearing fruit. Whilst volumes were down in 1Q14, margins and profit were up materially. This division has become a more consistent profit contributor than Agri now.
 
Agri stake sale is on track. The transaction is in the process of clearing a wide array of regulatory hurdles, but Noble sees it closing at the end of 3Q14/start of 4Q14. Agri’s seasonal loss was higher than MER expected, but also lower versus 1Q13. The main weakness came in China crushing (as it did for peers) and coffee (volatile prices). That said, Noble indicated that it has been locking in good forward margins in sugar, the division’s key swing factor.
 
Action and recommendation
MER thinks their Sum of Parts based valuation (S$1.50) is conservatively struck, as it assumes no pay-down of debt or reinvestment of the proceeds from the Agri stake sale. Flexing those assumptions, MER can reach fair values on the order of approximately S$1.75 per share for Noble. The strong 1Q14 further reinforces Noble as MER’s top pick in the sector.

MER has an Outperform rating on Noble Group with a 12-month target price of $1.50, 14% above Noble’s last closing price of $1.315. MER believes the stock price catalyst will come from its next quarterly results and commodity demand trends.

Source: Macquarie Research - 20 May 2014