Yesterday, Bloomberg reported that 24 banks have signed up for a US$2.55b revolving credit facility for Noble Agri. Macquarie Equity Research (MER)  believes that this news is a key milestone in Noble’s transformation path, and thinks that the market is under-appreciating the value accretion from this transformation exercise. MER released a research note yesterday on Noble. Excerpts from the research note can be seen below.

Impact
On course to report materially lower gearing. MER calculates a pro-forma consolidated net gearing of 29.5% for Noble Group by year end of 2014 (down from 115.9% at first half of 2014). Reaching this was conditional upon:
       - The completion of the US$1.5bn sale of a 51% stake in NAL to a COFCO-led consortium (closure was confirmed on Sep 30th).
       - External refinancing of Noble Agri's US$2bn inter-company loan from the Group. This is now also effectively done, in light of Bloomberg's news.

There remains one outstanding variable, which MER does not see as a major risk: The US$1.5bn the consortium paid for its 51% Noble Agri stake is based on a target 1.15x P/BV for Noble Agri's year-end 2014 book value (which is, of course, not on the books yet).

Any difference to that valuation would need to be covered by the relevant party. For example, if 1.15x the actual year end 2014 book value for Noble Agri, multiplied by 51%, results in less than US$1.5bn, Noble pays the consortium the difference, and vice versa.

At first half of 2014, Noble Agri's reported book value, adjusted for the intercompany loan, was US$2.77bn. If MER assumes that Noble Agri logs a similar loss in 2H14 to that reported in the first half of 2014, the year end 2014 book value would drop to US$2.53bn. 51% of that figure, multiplied by 1.15x gets to US$1.48bn, which is only slightly below what the consortium paid. But MER notes that Noble Agri's seasonality favours the second half. If Noble Agri's second half 2014 net loss is lower than the first half, it will be pretty close to the US$1.5bn paid, implying only a small adjustment payment, either way.
‌
MER’s action and recommendation
Commodity linked stocks are out of favor due to an ongoing backdrop of weak pricing. But commodity trading houses are more focused on moving commodities around the world whilst hedging price risk. The sector does also face headwinds. But MER likes Noble as it is undertaking a seismic, value accretive restructuring exercise, whereby it is deconsolidating its loss-making Agri division to focus on a profitable non-Agri business (energy and metals).

MER has an Outperform rating on Noble Group and 12-month price target of S$1.60. MER sees Noble’s third quarter 2014 results on 7 November 2014 as a price catalyst.

Source: Macquarie Research - 15 Oct 2014