Noble Group 3Q Results

by OCBC INVESTMENT RESEARCH (11 Nov)

STELLAR performance despite challenging landscape: Noble Group impressed with a stellar set of Q3 2008 results. Net profit surged 145.3 per cent y-o-y to US$148.8 million despite a general softening in demand for commodities.

This was achieved on the back of a 66.3 per cent y-o-y growth in revenue to US$9.4 billion. Excluding one-off gains, net profit would still have risen by 115.6 per cent to US$130.8 million. The group's results were commendable except for losses recorded by the metals, minerals & ores (MMO) segment.

MMO reported a loss of US$8.8 million at the gross level due to a sudden and sharp fall in demand for steel, aluminium and iron ore. Looking ahead, this segment should no longer drag on group's profitability in Q4 2008 as residual steel and iron ore stock account for less than 2 per cent of the group's inventories.

The strong showing from its other segments was more than sufficient to offset losses incurred by the MMO segment, proving the merits of Noble's diversification across various asset classes. Overall gross profit margin improved to 4.01 per cent (from 3.61 per cent in Q3 2007), while net profit margin strengthened to 1.6 per cent (from 1.1 per cent in Q3 2007).

Noble quashed concerns over its funding profile by reporting an increase in its cash levels to US$1.1 billion in September (versus US$0.8 billion in June). Easing commodity prices helped to ease working capital requirements and strengthened its cash position.

We note that only 30 per cent or US$1 billion of the group's debt will mature within the next 18 months, and this can easily be repaid using its current cash holdings. The remaining 70 per cent of its debt will mature in 18 months to seven years, and hence poses no immediate concerns to the group. Furthermore, net gearing after adjusting for its readily marketable inventories stands at a modest 4 per cent.

Recommendation: We have raised our FY2008 earnings estimate by 18 per cent following Noble's strong Q3 2008 showing. Our valuation parameter, however, has been trimmed to 10 times (from 12 times) to reflect the risk of a prolonged recession and credit crunch, which could hurt demand for commodities.

-Research Report by OCBC INVESTMENT RESEARCH (11 Nov)