Noble Group - DBS Research 2016-11-11: Not out of the woods yet

Noble Group - DBS Vickers 2016-11-11: Not out of the woods yet NOBLE GROUP LIMITED N21.SI

Noble Group - Not out of the woods yet

  • Second consecutive quarter of losses with 3Q16 core net loss of US$10m.
  • Focus on liquidity impacted profitability once again with operating cashflows still negative.
  • Rally in coal prices an opportunity to drive earnings but subject to liquidity constraints.


Confidence yet to be fully restored. 

  • We maintain our HOLD call on Noble Group (Noble) with a revised TP of S$0.20. 
  • While Noble has strengthened its balance sheet with the sale of Noble Americas Energy Solutions (NAES) for S$1.05bn, it will take time to restore confidence in Noble’s business model. This is due to Noble still generating negative operating cashflows and having volatile profitability or losses, as well as various credit agencies placing Noble on a negative outlook.


Near-term earnings pressure. 

  • Noble’s focus on its liquidity position has constrained the group's ability to take advantage of opportunities and generate profits. 
  • Combined with costs associated with closing capital-intensive or loss-making 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

  • Given faster than expected turnaround of the Mining and Metal segment, we raised our TP to S$0.20 from S$0.19. Our TP is a blend of PE valuation (S$0.09 : apply PE multiple of 7.7x which is -0.75SD of its mean from 2005 to FY17F based on core EPS) and P/B valuation (S$0.27: 1x P/BV and US$1.05bn for NAES but attributing zero value to its associates/JVs, Level 3 assets and intangibles). 
  • We also now assume USD/SGD FX rate of 1.40 versus 1.37 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/ 2016-11-11
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.20 Up 0.190




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