Noble Group Ltd: Good performance despite harsh operating conditions

Laudable market share gains. Noble Group Ltd's (Noble) 1Q09 results exceeded expectations. The group managed to grow its volume across all business segments despite challenging operating conditions, demonstrating its ability to expand market share by delivering superior service quality. Total tonnage rose 26% to a record 49.3m MT. Revenue and earnings fell as a result of the slump in commodities prices, but this was to be expected. Revenue declined by 36.0% YoY to US$6.1b while net profit contracted 46.0% to US$90.2m, forming 24% of our full year earnings estimate. Stripping away the impact of one-off gains in 1Q08, core net profit would have contracted by a smaller 24.4%.

Agriculture - a steady pillar of support. Not surprisingly, the Agriculture segment helped to steady the group's earnings, turning in a 11.7% YoY growth in gross profit. All other segments registered lower gross profits as the global recession crimped demand for energy and hard commodities. Gross profit from the Energy segment declined by 64.0%, while that from Metals, Minerals & Ores (MMO) fell by 75.5%. This resulted in the group's total gross profit falling 37.3% to US$222.7m. On the bright side, the MMO segment returned to profitability in 1Q09 after suffering two quarters of losses, suggesting that the worst may be over and that markets could be normalising.

Balance sheet remains healthy. Noble maintained a healthy balance sheet with cash position stable at US$1.2b (vs. US$1.3b in 4Q08). The group remained in a net cash position after adjusting for readily marketable inventories. Cash conversion cycle improved to 11 days from 14 days a year ago, while proportion of hedged inventories remained robust at 93%. More significantly, operating cash inflow improved to US$77.4m vs. an outflow of US$120.3m a year ago, thanks to lower commodity prices. Lower commodity prices have helped to reduce the group's working capital requirements and need for debt, allowing it to retire US$45m of long term debt in 1Q09, and in turn, easing finance costs.

Poised to benefit from economic recovery. Having gained its foothold with greater market share, Noble is well poised to leverage on the global economic recovery as well as pump-priming activities. We are keeping our earnings estimate intact, and raising our fair value estimate to S$1.66 (from S$1.33) as we lift our valuation parameter to 10x from 8x to account for heightened risk appetite for cyclical recovery stocks. Maintain BUY.

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