Energy resources and metals make up more than 60% of Noble’s sales. Excess global metal inventories, peaking power demand and a policy shift away from coal towards greener energy sources means the long-term structural demand for these products is under pressure. While we see a silver lining in public pump-priming efforts, this would not be enough to offset weakness in private consumption. Together with weak prices, 2009 earnings should retreat 64% YoY. We believe the Street has yet to fully reflect this in its estimates, hence our below-consensus forecasts.
Biased towards staple commodities, Noble’s agribusiness volume will grow with global consumption in the long term. However, falling prices will squash margins. We expect agriculture gross-profit margins to return to levels seen before the 2008 commodity bubble (from 4.4% per tonne to 3.3% by 2010). Historically, Noble’s logistics profit does not gyrate in sympathy with the Baltic Dry Index (BDI). Hence, we argue that it is not a BDI play and we should not see the recent recovery of the index as a positive price catalyst.
Noble’s debt profile is biased towards long-term non-bank capital-market instruments, significantly reducing its refinancing risks. Also, falling commodity prices and hence lower working-capital requirements to fund inventories would translate into lower interest costs. Nevertheless, group EVA™ will turn negative in the medium term due to contracting earnings and limited capital-management initiatives.
At 13x 09CL PE, Noble is at a 62% premium to its long-term average. It is also trading at a large premium to the peer average of 10x and in line with higher-yielding Singapore mid caps. To reflect Noble’s transformation from a supplier to a producer, we base our target price on a blend of DCF using a 10% WACC and peer valuations, implying 32% downside.
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