Noble Group - Less attractive on weak commodities outlook; downgrade to Neutral

What happened
We lower our Noble 12m TP to S$0.77 and downgrade our rating to Neutral from Buy. This mainly reflects our Commodity team’s less constructive views on commodity prices which would negatively affect Noble’s profitability and cash generation from derivative assets. With Noble shares trading at 0.7X 2015 P/B – the historical monthly avg low, the market looks braced for book value erosion. This seems appropriate in light of cash flow generation uncertainty. Since we added Noble to the Buy list on 25 May 2012, stock is -33% vs STI up 20%. We attribute this underperformance largely to lower than expected global commodity prices.

Current view
Lower EPS/TP, change TP methodology to P/B – We lower our 2015E- 17E EPS by 13%-24% on lower GS oil and iron ore price forecasts, and as we factor in Noble’s new segmental disclosures. Given the uncertainty around future cash flow generation from derivative assets, we change our valuation methodology to P/B. Consequently, we lower our 12m target price to S$0.77 using a blended 2015E P/B based on 50% weighting each of our Base Case and Bear Case book values (we apply a multiple of 0.9X, the previous historical monthly low which is consistent with a declining ROE outlook). Our previous 12-m TP of S$1.30 was based on 2015E EV/GCI vs. CROCI/WACC.

Credit related concerns, but Balance Sheet appears healthy – Credit related concerns have driven Noble bond yields up 125bps over the past month, with potential credit rating downgrades a key risk for Noble (currently one notch above junk status), as cost of funding could increase significantly. However, our analysis indicates that even assuming associate Yancoal and Level 3 derivative assets are fully written down, gearing (net D/E) would only rise to 134% (vs. a 5-year historical average of 106%), while liquidity remains high (US$11bn of unutilized bank facilities).


Technical Analysis
Daily Chart
Risks: higher-/lower-than-expected commodities prices/margins; derivative asset write-downs; credit rating downgrade. (Read Report)

Read Related Report
Noble Group - Issues Open Letter to Mr. Michael Dee
Wednesday, 17 June 2015
- Noble Group Company Announcement

Source : Goldman Sachs Equity Research

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