Noble Group - DBS Research 2016-10-10: Delivers on asset sale

Noble Group - DBS Vickers 2016-10-10: Delivers on asset sale NOBLE GROUP LIMITED N21.SI

Noble Group - Delivers on asset sale

  • Sale of Noble Americas Energy Solutions for US$1.05bn above expectations.
  • Adjusted gearing projected to fall to c.30% from 76% post NAES sale and recent rights issue.
  • TP raised to S$0.19 from S$0.175.


Confidence yet to be fully restored. 

  • We maintain our HOLD call on Noble Group (Noble) with a revised TP of S$0.19. 
  • While Noble Americas Energy Solutions (NAES) was sold for S$1.05bn, above the US$900m price reported previously by the press and Noble has further strengthened its balance sheet, we believe it will take time for Noble to restore confidence in its business model given negative operating cashflows, volatile profits and various credit agencies placing Noble on a negative outlook.


Near-term earnings pressure. 

  • Due to Noble’s focus on its liquidity position, this has constrained the group's ability to take advantage of opportunities and generate profits. 
  • Combined with costs associated with closing capital-intensive or lossmaking businesses, we expect Noble’s earnings to remain under pressure until at least the completion of the sale of NAES in December 2016.


Potential re-rating catalysts. 

  • To overcome investor concerns, we believe the following initiatives may help to re-rate Noble. These include: 
    1. a partial or full sale of its associates and/or Level 3 assets at or above stated book values to demonstrate the value of these assets; and 
    2. strategic investor in Noble itself or one of its divisions to provide reassurance over its business model.
  • However, ultimately Noble has to demonstrate a sustained improvement in its free cash flow generation and earnings growth to support any re-rating.

Valuation

  • Post the better-than-expected sale price for NAES, we raise our TP to S$0.19 from S$0.175. Our TP is a blend of PE valuation (S$0.075 : apply PE multiple of 7.7x which is -0.75SD since 2005 to FY17F core EPS) and P/B valuation (S$0.30: 1x P/BV and US$1.05bn for NAES (US$900m previously) but attributing zero value to its associates/JVs, Level 3 assets and intangibles).
  • We also now assume USD/SGD FX rate of 1.37 versus 1.34 previously.

Key Risks to Our View

  • The key risk to our view is that Noble secures a reputable strategic partner which would provide confidence over the valuation of Noble’s assets which is being challenged by investors and its ability to generate sustainable positive free cash flows.




Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-10
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.19 Up 0.175



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