Noble Group, whose shares have tumbled 13% over the past week on an Iceberg Research report  which took aim at Noble’s business model and compared the company to fallen giant Enron, released its fourth quarter 2014 numbers yesterday. While Macquarie Equities Research (MER) considers the results weak, it reiterated its Outperform rating on the stock and sees Noble as a good value play.
 
Read on for excerpts from MER’s research report published on 27 February 2015……

Event
Noble’s clean net income was weak at US$12m. MER sees pressure on the street consensus full year 2015 estimates in the high single-digit to low-teens percentage range, with Agri being the swing factor (MER is approximately 10% above consensus). That said, MER still sees Noble as a good value play and reiterate their Outperform rating on the stock.
 
Impact
Agri and Metals, Mining and Ores (MMO) drove weak result; Energy still strong: Stripping out Noble’s large US$309m of net impairments, clean fourth quarter 2014 (4Q14) net income (post perpetuals) came in at a weak US$12m. The culprits were Agri (now an associate) due to weak sugar prices and Territory Resources (TTY), an iron ore business in MMO which logged a supernormal loss as it was placed into “care & maintenance”. But Energy’s gross profit was reassuringly solid. MER does see pressure on consensus FY15 estimates in the high single-digit to low-teens percentage range, with Agri as the swing factor. But taking a step back, MER is encouraged by the approximately 15% return-on-equity (ROE) the overall non-Agri business delivered in a tough 2014 (it would have been 18%, if MER adjusts for the TTY loss).
 
Several impairments set a cleaner balance sheet slate for 2015: As widely expected, Noble took an impairment on Yancoal, but the US$200m hit was far lower than the implicit approximately US$600m suggested by Iceberg. Noble says it is valuing Yancoal using a coal price below prevailing market levels. It also took an impairment of TTY alongside the operating loss. On its call, Noble said it saw few additional impairments risks. MER also notes that final Agri stake sale proceeds of US$1.5b were in line with expectations, and Noble enters FY15 with net debt at its lowest level since 2009, with gearing of 60% (versus approximately 100% in the past). In fact, it is raising its payout ratio to 35% from 25%.
 
Good defence of the business model: There were many questions around the mark to market (M2M) accounting Noble uses to value its contracts and hedges. This was, after all, the main focus of Iceberg’s second report. Noble’s principal message, as MER understood it, was: The company is a trading house not a commodity producer. As such it will always have thousands of contracts of various tenor running through our P&L daily. The only way to risk manage such a business is via M2M which gives a daily picture of the value at risk. That certainly isn’t “new news” but it was good to have management address a raft of questions on the matter, making the case that its approach was not aggressive and that Iceberg had analysed many examples incorrectly.
 
Earnings and target price revision
No change. MER will be reviewing their model now that they have the accounts with the full de-consolidation of the Agri division.
 
 
MER’s price catalyst
12-month price target: S$1.60 based on a Price to Book methodology.
Catalyst: Iceberg has promised a third report. Noble is likely to respond to it.
 
MER’s action and recommendation
Noble ended its full year 2014 with a book value per share of S$1.00, and MER sees a premium valuation to that as justified, despite the likely hit to consensus numbers.

Source: Macquarie Research - 27 Feb 2015