On Friday, Noble Group announced a third quarter (3Q14) clean net income of US$77mn (post perpetual securities payments) which was 27% below Macquarie Equities Research’s (MER) US$105m forecast, as a result of higher than expected sales and marketing (SAO) expenses.

The disappointing result however, was in MER’s view, partially softened by the announcement of a US$0.03 per share special dividend. Yesterday, Noble shares opened more than 8% higher from Friday’s close, and eventually closed 4.6% higher at $1.25.

Investors interested in MER’s analysis of Noble’s results may wish to read on for excerpts from the research report published on Friday, 7 November 2014…

Headline gross profit was good, coming in 4% ahead of MER’s estimate. A faster than expected recovery in the Agriculture division offset weaker than expected margins at Energy and Metals, Minerals and Ores (MMO). Based on commentary from the call, it seems that the soft coal market is having an impact, while oil, gas and power activities are doing much better within Energy.
 
MER would note that Noble’s value at risk (VAR) came in at a record low level, ending the quarter at 0.21% alongside low levels of volatility in Noble’s end markets. Higher VAR tends to drive higher profitability at Noble (Fig 2). With the renewed action in oil markets starting in October, Noble could see a better 4Q14 in Energy (although management was not ready to commit to such an outcome on the call).
 
Sales and marketing (SAO) expenses drove the shortfall. The US$212m logged in 3Q14 was US$50m higher than 2Q14’s US$162m. Management highlighted higher headcount and bonuses as drivers, which sounds like they may result in higher than expected SAO levels annually going forward. Management also noted some one-off expenses related to the Agriculture stake disposal, but MER were not able to get them to quantify those.
 
US$0.03 special dividend softens the blow. When asked about the potential for share buybacks given the recent weakness in the share price, management was noncommittal but did indicate that it was in the process of undertaking a detailed analysis of its optimal capital structure on a go-forward basis. The results of this analysis could be unveiled in the coming months.
 
MER’s action and recommendation
Whilst Noble’s 3Q14 result was disappointing, and some technical overhangs remain on the shares, it remains MER’s top pick in the Singapore commodities space. MER continues to see the risk-reward on the stock skewed to the upside, given the significant degree of optionality management now has post the closing of the Agriculture stake sale to a COFCO led consortium.

MER has an Outperform rating on Noble Group with a 12-month target price of $1.60 based on a Price to Book methodology.

Source: Macquarie Research - 11 Nov 2014