Noble Group - Still early days
- 4Q16 core loss of US$118m worse than expected.
- Focus on liquidity hampers profitability with third consecutive year of negative operating cashflows.
- Earnings recovery in sight but positive cashflow generation still uncertain.
- We maintain our HOLD call on Noble Group (Noble) with a revised TP of S$0.23.
- While Noble’s share price has rallied on a potential investment by Sinochem, we believe a further re-rating beyond the current level is unjustified without details over Sinochem’s potential investment and/or a material improvement in free cashflow generation.
Sinochem investment not a sure bet yet.
- We had earlier identified Noble securing a strategic investor as a re-rating catalyst given the potential reassurance over Noble’s book value and business model.
- While Sinochem is in discussions with Noble, we believe it is still too early to ascribe a value to the balance sheet items which the market has been questioning for the past two years (i.e. for a re-rating above c.S$0.23), given risk that Sinochem may withdraw, lack of details over structure of any transaction and the carrying value of these assets still falling.
Questions still remain over earnings quality and cashflow.
- While we expect Noble to return to profitability in 2017 as it is no longer constrained by the need to preserve liquidity, we believe a sustained re-rating beyond current levels will be difficult given
- potential negative free cashflows given the need to build up inventories, and
- questions over the quality of Noble’s earnings (2016 profits were boosted by US$126m of unrealised gains on Level 3 assets whose valuations were based on inputs determined by the company).
- Given prospects of a potential strategic investment by Sinochem, we have pegged our TP to our book valuation of S$0.23.
- This is based on 1x PV and potential US$200m deferred payment from Noble Agri but attributing zero value to Noble’s associates/JVs, Level 3 assets and intangibles. We have used a USD/SGD FX rate of 1.40.
Key Risks to Our View
- The key risk to our view is Sinochem taking a stake in Noble above our TP or Noble delivering better than expected profits/cashflows.