Noble Group's Agri segment continues to rot

Persistent problems led to poor earnings.

According to Maybank Kim Eng, the once-rosy prospects for Noble Group's Agri segment has begun to fade as it becomes apparent that its new asset-lighter strategy has not worked as a magic bullet to lower costs and boost profits. Earnings expectation for the troubled segment may now be too optimistic, said the research firm, especially as sugar prices remain low.

Here's more from Maybank Kim Eng:

Poor quarter, downgrade to HOLD. 1Q13 results were significantly below market expectations, as problems in its agricultural segment persist. We had earlier been positive on its new asset-lighter strategy and the benefits of that in terms of lower overhead cost and strong balance look intact. However, the poor earnings level and visibility will likely continue weighing on the stock. Downgrade to HOLD.

Below expectations. 1Q13 recurring net profit was down 55% yoy to USD60.5m (reported net profit was USD41.3m), with both revenue and overall tonnage staying flat. Gross profit declined by 31%, with both the agri and MMO segment contributing to it. SG&A declined by 19% while net interest cost declined by 13%, implying that management’s aim to reduce overall overhead cost by USD100m remains on track.

Not so rosy at Agri and MMO. While 1Q13 is a seasonal low for the Agri segment, it still surprised by swinging into a maiden operating loss of USD66m. This was attributed to one-off reasons of lack of beans due to poor harvest in Argentina and logistics disruption in Brazil. While we expect this segment to improve as the year goes on, earnings expectation now look too optimistic and structural issues of low sugar prices will continue to hurt. Management alluded to start-up costs at MMO segment as they diversify into new products, which implies profit may remain poor at least for a few more quarters.

Stronger balance sheet thesis remains intact. Adjusted net-debt/ equity remained similar at 0.38x and we expect the lower gearing and improvement in debt credit rating to provide downside to the 7.3% average debt cost last year. This will be further aided by lower commodity prices which generally imply positive operating cash flow for Noble. Capex guidance remains the same, at USD500m over next the two years.

Entry level of SGD1.00. We cut our FY13F-FY15F earnings by 18-26%, to take into account longer gestation periods for its sugar and MMO business. Our TP of SGD1.17 is pegged to 13x FY13F. Poor earnings visibility and level is likely to be a negative driver of stock price in the near-term, but we would recommend entry around SGD1.00, where 1x P/B provides very strong downside support to share price.