Noble Group - DBS Research 2016-08-12: Hurt by liquidity constraints

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NOBLE GROUP LIMITED N21.SI

Noble Group - Hurt by liquidity constraints

• 2Q16 core loss of US$44m missed expectations, operating cashflows remain negative.
• Profitability impacted by focus on liquidity and restructuring costs.
• US$1bn gross profit and US$550m EBIT target for 2018-2019. 

Lacking confidence. 

• We maintain our HOLD call on Noble Group (Noble) with a revised TP of S$0.175. 
• We believe it will take time for Noble to restore confidence in its business model given negative operating cashflows, volatile profits and various credit agencies placing Noble on a negative outlook. This is despite Noble’s plans to strengthen its balance sheet through the disposal of its 49% stake in Noble Agri and proposed sale of Noble Americas Energy Solutions (NAES).

Near term earnings pressure. 

• Due to Noble’s focus on its liquidity position, this has constrained Noble’s ability to take advantage of opportunities and generate profits. 
• Combined with costs associated with closing capital intensive or loss making businesses, we expect Noble’s earnings to remain under pressure until at least the sale of NAES in 4Q16.

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.

Valuation

• We reduced our TP to S$0.175 from S$0.32 (or S$0.25 on rights adjusted basis). 
• Our TP is a blend of PE valuation (S$0.07 : apply PE multiple of 7.7x which is -0.75SD since 2005 to FY17F core EPS) and P/B valuation (S$0.28 : 1x P/BV and US$900m for NAES 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.dbsvickers.com/ 2016-08-12

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.175 Down 0.25