NOBLE GROUP LIMITED
N21.SI
2Q15: All About Confidence
- Noble reported net profit of US$63m for 2Q15 (-4.8%yoy, -41.3%qoq) and US$169m (-22.4%yoy) in 1H15.
- Net profit in 1H15 accounted for 45% of our earnings estimate but only 33% of consensus.
- Noble’s two-hour results briefing mainly focused on its valuation on Yancoal, mark-to-market valuation (MTM) and PwC review.
- The PwC report and the upcoming Investor Days should improve investors’ confidence but there is still a long way to go with regard to restoring investor confidence.
- Maintain HOLD. Target price: S$0.65. Entry price: S$0.56.
RESULTS
• Results were not the main focus.
- Noble reported 2Q15 net profit of US$63m (-4.8% yoy, -41.3% qoq) and 1H15 net profit of US$169m (-22.4% yoy).
- 1H15 accounted for 45% of our earnings but only 33% of consensus expectation.
- 2H15 should see higher sales volume which would help Noble catch up in terms of earnings to meet our expectation.
• 2Q15 was relatively flattish compared with 2Q14.
- Weak commodity prices in 2Q15 dragged down Noble’s turnover by 22% yoy, but its operating profit was down by only 4.1% yoy thanks to higher sales volume (+22.5% yoy), the company’s focus on higher margin products and cost reduction initiatives.
- Noble’s cost reduction initiatives involved lowering headcount by more than 15% and guiding for saving contributions of US$70m.
- However, qoq results were weaker mainly due to lower qoq sales volume (-3.5% qoq) and Mining & Metal division dipping into the red largely due to losses from the aluminium business.
• 1H15 net profit was down 22.4% yoy
- 1H15 net profit was down 22.4% yoy due mainly to losses from the Mining & Metal and lower contribution from Gas & Power after an exceptionally good 1H14.
- Higher sales volume in 1H15 (+44% yoy) driven by new customers and products. However, margins eroded as commodity prices weakened.
STOCK IMPACT
• Energy (Oil Liquid & Energy Coal):
- 2Q15 and 1H15 reported strong yoy growth largely driven by strong volume growth from Oil Liquids reflecting the impact from the new deals signed in the US and also with a European crude refinery. Qoq, contribution from Oil Liquids was down in 2Q15 due largely to lower pricing.
• Gas & Power (Energy Solutions, Gas & Power).
- Oversupply in LNG puts downward pressure on prices.
- Lower PBIT contribution in 2Q15 (-49% yoy) and 1H15 (-19% yoy) was due largely to margin compression despite strong volume growth. The PBIT margin from the Energy Solutions sub-division was down due to lower price volatility which minimised trading opportunities and operating losses from the European Power & Gas division.
- Cost rationalisation is underway and closing down non-core operations in Hamburg and Oslo should support a turnaround in the division.
• Mining & Metals (Metals & Carbon Steel Materials).
- Rising supply adding pressure on pricing and margin.
- The marginal growth in sales volume (especially large aluminum supply) was offset by margin compression as premium for metals in key distribution locations weakened sharply. Lower PBIT for 1H15 was due to the declining prices of iron ore and metallurgical coal.
• Corporate & Others (Logistics, investment in major associates and JV).
- This division was loss making in 2Q15 and 1H15 due to losses from Noble Agri Limited (losses of US$124m vs total loss of US$142m).
- This loss mainly came from its sugar operations in China due to mark-to-market changes on forward sales made in the previous quarters, which are reserved upon deliveries. The sugar business remains challenging in Brazil and operations in South Africa are also facing challenges.
• PricewaterhouseCoopers (PwC) report.
- Noble engaged PwC to conduct a review on its MTM valuation. The report was publicly made available yesterday.
- In the report, PwC had stated that, “In our opinion, the individual valuations and overall valuation of the contracts included in the group’s consolidated balance sheet as at 20 Jun 15 comply, in all material respects, with the relevant criteria”.
EARNINGS REVISION/RISK
- No change to earnings forecast.
VALUATION/RECOMMENDATION
- Maintain HOLD with lower target price of S$0.65 (previously: S$1.05) after we trim our PB valuation from 1.0x BV to 0.6x BV (lowest PB during 2008/09 financial crisis was 0.5x BV).
- We lowered our target PB in view of the bearish commodity cycle and the time it will take to rebuild investors’ confidence and interest.
- We reckon that Noble’s management has been putting in a lot of effort to engage with stakeholders and to engage another audit firm to review its MTM valuation. However, it will still take time to restore market confidence.
- Entry price: S$0.56.
- The company’s aggressive share buyback programme could provide some near-term share price support.
- Noble is hosting an Investor Day event on 17 Aug 15 which will be open to all.
SHARE PRICE CATALYST
- Stronger balance sheet, i.e. to lower its gearing and to generate consistent positive operating cash flow.
Singapore Research Team | http://research.uobkayhian.com/ UOB Kay Hian 2015-08-11
0.65
Down
1.05
