Pressure on prices, crush margins subsiding.
The earnings outlook for Noble Group is looking brighter as prices and crush margins may soon see a resurgence, according to Barclays Research.
Noble Group may see its agricultural business margins recover as well as revive its volume growth, which will help the company post better earnings this year.
Here's the full company analysis from Barclays Research:
The de-rating of Noble (which began in 3Q11, coinciding with the peak of mined commodity prices) may be coming to an end, in our view. The headwinds of lower prices and crush margins and the sharp declines at its Indian iron ore trading business are abating, and management has embraced a strategy of remaining asset-light when its major competitors are moving in the opposite direction. A turnaround in its agricultural business margins is the key on a 6- to 12-month view to an earnings rebound, while the optionalities presented by its scale and balance sheet (relatively healthy compared to competition) will enable growth long-term. The shares are currently trading at a 10-15% discount to peers' average valuation, while early signs are emerging of an earnings trough in the agriculture division in 3Q13 which, if sustained, could drive a 12% y/y increase in 2014E EBITDA on our estimates. We rate Noble as Overweight with a DCF-based price target of S$1.20.
Scalable business to benefit from arbitrage opportunities: Noble traded 225mt in volumes in 2012 and competes head-to-head in most segments with its largest publically listed competitor, Glencore Xstrata (GLEN.L; EW; covered by Ian Rossouw). Critical mass in most of its operating segments better positions Noble in a business where scale is an important enabler to squeeze additional profit from the supply chain.
Volume growth is slowing though balance sheet remains strong: While the decade average CAGR of 17% is strong, volume growth in 2012 has slowed to 2% y/y (3% in 1H13) – understandably due to lost volumes of Indian iron ore and a tough operating environment in agriculture. However, Noble has one of the lowest gearing levels at 45% (ex-liquid inventories) in its peer group, which we believe is a key enabler to revive its volume growth. Recent win of volumes in zinc and seed investment of US$500mn in 'X2' validates the use of balance sheet flexibility to generate new business, in our view.
Agriculture remains a drag on earnings; sugar could see seasonal boost: Noble's rolling four-quarter average margin in the agriculture division declined for the 12th straight quarter, with actual margins staying negative for 1Q and 2Q13. The oilseed and sugar divisions are the key drivers of this decline; we believe the sugar business could see a seasonal boost towards end 2013 before oilseed sees any material turnaround. Lack of turnaround of the agri business and commodity prices remain the key risks.
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