Dump Noble Group stock: OCBC

Piling problems include dismal net loss, unexpected CEO exit and bleaker demand for its products.

Noble Group posted a steeper-than-expected net loss of $17.5 million in 3Q11, which led OCBC to lower earnings estimates by 40% in FY2011 and 21% in FY2012.

Confidence in the company further deteriorated with the untimely resignation of CEO Ricardo Leiman on the day of the earnings announcement.

Weak Chinese demand for its cotton products next year also add to the OCBC's urging to SELL since "things may get worse before they get better."

Here's more from OCBC:

Shocking 3Q11 net loss. Noble Group posted a surprising net loss of US$17.5m in 3Q11, which management explained was mainly attributed to "transitory events" involving its Agricultural (cotton) business, as well as significant writedown in its carbon credit trading business. In reaction to this setback, we immediately reduced our FY11 core earnings estimates by 40% and FY12 earnings by 21%.

CEO resignation adding to the uncertainty. Besides the surprising net loss, we believe that the market also did not take too kindly to the unexpected resignation of its CEO - Ricardo Leiman - which came on the same day of the results announcement. Although Chairman Richard Elman will take over as acting CEO and Leiman will stay on as an advisor, the news could add further to the uncertainty. The move could also delay the group's plan to spin-off its Agricultural business on the SGX, which has already received approval from the stock exchange. As a result, the share price took a sharp knock of nearly 27% in the following session and it has continued to languish under S$1.20.

And economic environment is worsening. Given the increased risk of another slowdown in the global economy, led by the US and unresolved debt issues in Europe, which could also potentially affect China, we believe that the outlook for the global commodity market is likely to remain challenging; especially for hard commodities like industrial metals and even energy. On the other hand, Agriculture commodities should remain flat, as food items are likely to hold out or even push higher as consumers are not expected to cut spending on essential items; but commodities like rubber and cotton are likely to fall should consumers cut discretionary spending.

Reducing our fair value further to S$1.02. In view of the worsening economic outlook, we are again reducing our FY12 revenue forecast by 3% to reflect lower commodity prices and core earnings by 16% on lower margin assumptions. While we are maintaining our valuation peg at 9x (or one standard deviation below its 5-year mean), our fair value drops to S$1.02.

And should the markets continue to remain volatile, we believe that the planned listing of its agricultural business would probably only take place in late 2012. Given the dearth of positive catalysts, and the likelihood that things may get worse before they get better, we maintain our SELL rating.

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Tags: Noble Group net loss, Noble Group CEO resignation, Noble Group SELL rating, OCBC recommendation Noble Group stock