We have made modest adjustments to our model, raising agricultural margins but lowering volumes, and factoring in less optimistic assumptions for the energy and MMO segments, the latter on the back of new iron ore demand forecasts. We thus lower FY09E and raise FY10E earnings by 7% and 8%, respectively.
We now forecast aggregate volume growth of 0.8% YoY in FY09E, from 9.3% YoY previously, with core earnings to decline 53% YoY. In Noble’s recently published annual report, management explicitly targets to maintain FY08 volumes in the current year.
Noble trades at 14x P/E, versus its historical and peer averages of 8.5x and 12x, respectively. On our new DCF-based S$0.95 target price (from S$1.20) and given the recent rally then, we downgrade the stock from Neutral to UNDERPERFORM. We prefer Olam (OUTPERFORM) for its steadier volume and earnings growth.
Comments from dry bulk shippers at our AIC indicate that the recent BDI rebound could likely be driven by inventories restocking rather than a fundamental demand surge. This suggests that the BDI may be due for a correction in the near term, in view of China’s recent record iron ore imports but limited steel production growth. There are, however, expectations of a demand recovery in 2H09 as the stimulus packages globally take effect. While the conclusion of iron ore negotiations could be a BDI trigger, the impact could likely be muted with current spot prices close to contract prices.
Fundamentally, we remain cautious on the earnings outlook for Noble, as its product portfolio remains significantly more cyclical. Noble is involved in three core commodities – agriculture crops, energy products and industrial materials – and is facing considerable headwinds for the latter two of these segments, which in aggregate contributed 67% of total revenue and 34% of total profit in FY08. The outlook for grains is expected to remain firm, and remains the strongest amongst Noble’s three core commodity segments, as the soybean pipeline gains traction, supported by the integration of S. American origination activities. Management also expects prices to stay firm throughout 2009, with sufficient disruptions due to climate-related factors to keep supply/demand tight.
The China PMI rose to 52.4 in March 2009, the fourth consecutive monthly increase, and more importantly rose above 50, suggesting an expansion for the first time since August 2008. CS thus sees lower risks to our 8% China GDP growth forecast. We believe this is positive for sentiment, although it does not deviate from our view that the global recovery will start in 2H09, and improve into 2010E.
Our Global Metals & Mining team has revised its iron ore demand model to reflect lower steel production levels in most major seaborne importing countries. Iron ore had grappled for five years to keep pace with increasing steel demand (which dissipated in 2H08) even before the industry achieved structural oversupply. With iron ore supply brought on to provide for the steel industry at near full employment then, on CS estimates, demand may only return to 2007/8 levels by 2012E.
The coal market should continue to see a decline in prices, on the back of more subdued crude oil prices. Even with a recovery in demand for materials in 2H09, CS expects cement and steel to lead the way, given coal’s profile as a late cycle player. We therefore anticipate continued demand destruction for Noble’s energy and MMO product segments in the near term.
Sponsored Links
No comments:
Post a Comment