In the span of one month, commodity supplier Noble Group has rallied almost 15%, reaching a new 16-month high in the process. Macquarie Equities Research (MER) believes this rally has been a result of astrong first quarter in 2014 (1Q14) which allayed concerns around Noble’s earnings story for 2014. MER believes that the market can now focus more on the transformational Agri division stake sale.
 
As we approach closing at the end of 3Q14 / start of 4Q14, MER believes investors are increasingly discounting potential cash usage scenarios from the sale. Thus, MER is doing the same, and had upgraded their 12-month price target on the stock to S$1.65 from S$1.50. Noble remains MER’s top pick in the Singapore-listed commodities space.

"The deal" is becoming "the story". MER see Noble’s sale of a 51% stake in its Agri division to a COFCO-led consortium as transformational, as it frees up capital at an attractive valuation for an ROE-dilutive business.
 
MER has concerns on the sustainability of strong profitability in the non-Agri business, especially in Energy, which looked at risk against weak industry backdrops. MER worries that any disappointment in non-Agri could detract from Noble’s compelling sum-of-the-parts story.

Blowout 1Q14 allayed concerns around the full year 2014 earnings story. Noble delivered a record margin in its Energy division in 1Q14 (the main non-Agri profit driver). Management did caution that the result was bolstered by an uptick in value-at-risk and that profitability would not recur at the same level, but MER’s sense is that the underlying Energy business remains healthy. Consensus estimates for the full year of 2014 imply an approximately US$8.5/T margin in Energy for the rest of the year, versus US$15.0/T in 1Q14, which MER thinks looks reasonable.
 
And the deal remains on track, with closing expected by the end of 3Q14 / start of 4Q14, i.e. in 4 to 6 months. MER thinks the market is starting to look at the potentially value-accretive use-of-proceeds scenarios from the stake sale.
 
Earnings and target price revision
MER’s base case fair value rises to S$1.56 from S$1.50 as they raise 2014E EPS by 17%, driven by Energy’s strong 1Q14. Increases from 2015 are only low single digit, which explains the lower increase in fair value. MER is in line with the consensus for the full year of 2014.

MER’s new S$1.65 price target is the midpoint of: 1) their base case fair value, which used to drive their price target and 2) the Fair Value of a scenario where Noble uses half the sale proceeds to repay debt and half to reinvest at an assumed +2% spread over its cost of equity (S$1.72).

Action and recommendation
With an expected 17% total stock return, reasonable consensus earnings estimates, and a hard catalyst that is transformational and fast approaching, Noble is MER’s top pick in the Singapore listed commodities space. MER believes the stock price catalyst will come from Noble’s quarterly results in August and November as well as the closing of its Agriculture stake sale.

Source: Macquarie Research - 11 Jun 2014