Olam, Noble to suffer disappointing gains

That's on top of weak global economy.

According to DBS, Noble and Olam have underperformed the FSSTI by 32-35% since Jan11 due to a combination of (1) subdued global economic expectations, (2) disappointing earnings (triggering a significant de-rating, drop of 12-24 PE points).

Here's more from DBS:

With Chinese GDP growth bottoming out in 3Q12 and now expected to accelerate next year to 8.5% from 8% this year (according to our DBS Group economists), the macro backdrop for supply chain managers is definitely looking up.

In addition, with several commodities now trading near their marginal cost of production, the risks of a negative shock to earnings from a severe price correction has receded.

Overall prospects still look bright despite potential headwinds over the medium term. Our analysis of the sector’s medium term prospects, suggests a bright outlook for Noble and Olam due to (1) China’s increased import reliance in certain commodities and (2) further growth from geographic and vertical integration.

This is despite the supply chain manager sector facing risks of (1) slower average Chinese GDP growth over next 5 years versus historical trend, (2) risks of higher earnings volatility as they push upstream, (3) a potentially tighter credit environment, (4) prospects of an increase in trade restrictions, and (5) the impact of volatile weather on commodity prices.

Noble closer to major re-rating. Noble (BUY) remains our stand out pick as we believe it is closer to delivering consistent y-o-y improvement in earnings.

This arises from its exposure to the rapidly growing US shale gas market, continued growth in its coal marketing volumes and better utilisation of its sugar mills. In addition we are attracted by the potential deployment of its c.US$788m cash proceeds from recent asset sales in value accretive M&As.

Olam (HOLD) on the other hand is looking more subdued near term as it readjusts its cost base after a significant period of investment. Managing this transition will, we believe, translate into weaker earnings and a more pedestrian share price performance.

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