Noble Group - DBS Research 2016-05-13: Still not out of the woods

Noble Group - DBS Research 2016-05-13: Still not out of the woods NOBLE GROUP LIMITED N21.SI 

Noble Group - Still not out of the woods

  • 1Q16 core profit down 59% - below expectations
  • Core Energy and Gas & Power segments underpressure
  • Secures new debt facility and is targeting to release in excess of US$1bn of liquidity



Range bound for now. 

  • We maintain our HOLD call and TP of S$0.32 for Noble. 
  • We believe it will take time for Noble to restore confidence in its business model. For example, despite Noble strengthening its balance sheet through the proposed disposal of its 49% stake in Noble Agri, sentiment continues to be fragile, given the downgrade of Noble’s credit rating below investment grade by Moody’s and S&P, with Fitch putting Noble on negative credit watch, and impairments of its assets.


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 value 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.


Headwinds from downturn in commodity markets. 

  • Given continued weakness in various commodity markets, we believe the ability to grow earnings is increasingly getting harder. 
  • Nevertheless, there is potential for Noble to pick up market share from its smaller competitors and expansion into the energy and power markets to mitigate against these headwinds.


Valuation:

  • We maintain our TP at S$0.32. 
  • Our TP is a blend of PE valuation (S$0.34 : using PE multiple of 7.7x which is -0.75SD since 2005) and P/B valuation (S$0.31 : 1x P/BV but attributing zero value for its associates/JVs, Level 3 assets and intangibles).


Key Risks to Our View:

  • The key risk to our view is Noble securing 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.dbsvonline.com/ 2016-05-13
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.32 Same 0.32


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