Noble Group Ltd: Our preferred pick within the commodities sector

Tuesday, September 22, 2009

Rosy prospects at undemanding valuations. Evidence of a global economic recovery has enhanced investors' preference for cyclical stocks such as commodities. Most stocks have appreciated significantly on expectations of earnings recovery, leaving few with cheap valuations. Against this backdrop of weighing the twin objectives of valuations and outlook, we reiterate Noble Group Ltd (Noble) as our preferred pick within the commodities sector. Noble has performed exceedingly well against an extremely challenging boom-and-bust cycle in 2008 and 1H09. Relentless market share gains have driven volume growth and good balance sheet management has yielded the group superior financial flexibility to capitalise on inorganic growth opportunities. We expect Noble to reap the rewards of its good management in FY10 as global economies recover and commodities markets normalise.

Multiple growth drivers, strong financial flexibility. Noble's growth prospects are backed by several drivers: (i) market share gains as buyers seek quality counterparties, (ii) normalising commodities markets, (iii) new capacity coming on stream, and (iv) inorganic growth. Noble recently acquired distressed assets of SemFuel via bankruptcy proceedings. The acquisition is expected to boost its product portfolio and enhance synergy. We believe that more distressed assets could emerge from the economic slump. Noble is well positioned to capitalise on such opportunities given its strong cash position (US$805.8m as of 1H09). The group's prudent balance sheet management has allowed it to fund acquisitions without needing to raise additional capital. In contrast, its peer Olam has recently raised additional capital to fund inorganic expansion, at the expense of diluting existing shareholders' interests.

Reiterate BUY, fair value raised to S$2.50. We have raised our FY10 revenue and earnings assumptions on the back of stabilising commodities prices. This lifts our fair value estimate to S$2.50 (previously S$2.26). Despite the recent share price appreciation, Noble trades at just 13.6x FY09F PER, a sharp discount to Olam's 22.7x PER. Current valuations are also undemanding against its historical valuations of 4.1x to 22.1x PER. The stock may see an upward re-rating as investors gain appreciation of its sound balance sheet health. We maintain our BUY rating on the stock.

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Wilmar International: Stronger then expected 2Q09

Friday, September 18, 2009

Ahead of expectations. Wilmar's 2Q09 EBIT and net profit rose by 8.8% and 14.0% y-o-y to US$538.7m and US$378.1m, respectively - despite a 27% y-o-y drop in revenues to US$5,712.3m. The group's 2Q09 pretax margin eased to 9.2% from 10.5% in 1Q09, but rebounded from 5.6% in 2Q08. Sequentially, palm & lauric merchandising and processing (M&P) pretax margin/MT declined to US$41 (from US$55 in 1Q09); although that for oilseeds dropped to US$27 (from US$47 in 1Q09). While flat to weaker oilseeds M&P margin was anticipated, that for palm & lauric came out stronger than expected. The group's consumer products also posted strong pretax margin of US$88/MT (vis-vis our initial forecast of US$35/MT for the full year).

Recovering commodity prices reflected in higher debts. Short-term borrowings increased to US$6.1b from US$3.4b in 1Q08 mainly to account for higher working capital needs on recovering feedstock prices q-o-q. Total borrowings increased to US$7.7b at the end of June translating to net gearing ratio of 37.8%, up from 22.6% in 1Q09.

TP upgraded to S$7.25, Buy call reiterated. We raised our assumption of palm & lauric M&P margin to 5.8% (from 4.4%); but reduced that for oilseeds M&P to 7.0% (from 7.7%). We also raised consumer products' margin assumption to 7.0% (US$87/MT) from 2.8% (US$35/MT), in light of the stronger-than expected performance. FY09F-10F earnings were hence upgraded by 13.2%-12.5%. We raised our DCF-derived, fully diluted fair value to S$7.25 (WACC 9.8%, terminal growth rate 3%). Our Buy call is reiterated for 16% upside (excluding 1% FY09F dividend yield).

Indofood Agri Resources - 2Q09: Results above expectations; expect sturdy margin in 2H09

Thursday, September 17, 2009

2Q09 core net profit jumped 78% qoq due to higher CPO ASP. We expect margin to remain stable in 2H09. We raise our target price to S$2.00 on higher margin assumption and a stronger rupiah against the US dollar.

Strong 2Q09 earnings on higher ASPs and forex gains. Indofood Agri Resources (IFAR) posted strong 2Q09 core net profit (excluding changes in fair value of biological assets), which increased 78% qoq to Rp427b. This was mainly attributable to higher crude palm oil (CPO) average selling prices (ASP) (+24% qoq) offset by lower CPO sales volume (-3% qoq), as well as forex gains of Rp240.2b in 2Q09 vs a loss of Rp94.8b in 1Q09.

1H09 core net profit, however, declined 21% yoy. Results are above our expectation as 1H09 core net profit represents 63% of our previous forecast. EBITDA margin improvement in 2Q09. EBITDA increased 31% qoq in 2Q09 on stronger revenue while cost held steady. Therefore, EBITDA margin improved to 37% in 2Q09 from 33% in 1Q09.

Sturdy CPO production ahead. As about 40% of plantation area is in the prime age and can produce high yield, and another 29% is expected to become mature area of about 54,789ha, we expect fresh fruit bunch (FFB) production to increase at a three-year CAGR of 9% in 2008-11.

Expect stronger revenue and sustainable margins in 2H09. We expect IFAR to post robust revenue growth in 2H09 on the back of sturdy CPO prices and higher production volume. Moreover, we believe margins in the plantation division are sustainable thanks to lower fertiliser purchase prices. Fertiliser prices ytd have fallen 30% compared with that in 2008. And IFAR’s current fertiliser price is 10% lower than in 1Q09.

Maintain BUY. As we have lifted our earning forecasts, we therefore raise our target price from S$1.45 to S$2.00, based on 12x 2010F PE for mid-cap and integrated plantation players.

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