DBS Vickers 2015-08-11: Noble Group - 2Q15 Results; May not be enough. Maintain HOLD.

NOBLE GROUP LIMITED N21.SI

May not be enough

2Q15 core profit was below expectations on losses at the Mining and Metals division.
PwC gives clean bill of health for Noble’s mark to market (MTM) accounting but this may not satisfy detractors.
Lacks re-rating catalysts; weak cashflows and low ROE still feature.
Maintain HOLD, TP lowered to S$0.57.

Noble’s 2Q15 PATMI after dividend for capital securities, but excluding profit from supply chain assets, came in at US$61.7m (-28% y-o-y), below expectations.
The result was impacted by US$19m of operating losses in the Mining and Metals division, from MTM losses on the back of significant declines in aluminum premiums.
This was partially offset by a 225% increase in Energy profits (US$221m) which benefited from a 30% jump in volumes, withdrawal of some competitors and the oil contango.
On the back of the soft results, we have cut our FY15-16F profit estimates by 1- 9%.
Nevertheless, earnings quality YTD has improved, with 1H15 unrealized gains from Level 3 assets (offtake agreements which are valued using assumptions that are at management’s discretion) booked in the P&L as a percentage of operating profits now at 4% versus 6%/19%/22% in FY14/ FY13/FY12.

After reviewing 81% by value of derivative contracts with a maturity of over two years and 98% by value of level three net assets, PwC confirmed that Noble was in compliance with the requirements of IFRS13 and standard industry practices.
However, we believe the market may remain skeptical given the conclusions from the PwC review was expected and Noble was unable to disclose specific assumptions for its models due to competitive reasons.

While we take comfort from the rigorous manner in which Noble conducts its valuations as disclosed in the PwC report, we believe it may not be sufficient to regain the market’s confidence in the near term, given the lack of specific model assumptions, still weak cashflows (-US$832m in 1H15), and low ROE (2% on 12 month trailing basis).
Thus, we maintain our HOLD call, but lower our TP to S$0.57 (from $0.95).
Our TP is based on1x PBV but assumes zero value for Noble’s associates including Yancoal and its Level 3 assets.
Upside risk to our view would come from additional disclosure during the investor day on 17Aug15 and/or a potential takeover approach.

Mervin SONG CFA | http://www.dbsvickers.com/ DBS Vickers Securities 2015-08-11

HOLD Maintain HOLD 0.57 Down 0.95