Noble Group - DBS Research 2015-11-13: Confidence shaken

NOBLE GROUP LIMITED N21.SI

Noble Group - Confidence shaken

We maintain our HOLD call and revise our TP lower to S$0.49.
We believe it will take time for Noble to restore confidence in its business model and the valuation of its associates and Level 3 assets (offtake agreements). This is especially in light of another underwhelming set of results.
3Q15 core profit after perpetual dividends fell 40% y-o-y.

To overcome investor concerns, we believe the following initiatives may help re-rate Noble. These include:
1. a partial or full sale of its associates and/or Level 3 assets to demonstrate the value of these assets; and
2. strategic investor in Noble itself or one of its divisions to provide reassurance over the its business model.
To that end, Noble stated that it could raise over US$500m through such transactions. However, ultimately Noble has to demonstrate a sustained improvement in its free cash flow generation and earnings growth to support any re-rating.

Given continued weakness in various commodity markets, we believe the ability to generate earnings growth is increasing getting harder.
Nevertheless, we still expect growth largely from Noble picking up market share from its smaller competitors and expansion into the energy and power markets.

We cut our TP to S$0.49 from S$0.57 as we now assume zero value for Noble’s intangibles given continued poor operating performance.
The previous assumptions underpinning our TP remain the same. This consists of valuing Noble at 1x P/BV but attributing zero value for Noble’s associates including Yancoal and its Level 3 assets.

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

Mervin Song DBS Vickers | http://www.dbsvickers.com/ 2015-11-13

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.49 Down 0.57