Noble Group - Diversified commodity proxy to global recovery; Buy

Noble, a global supply chain manager, seems poised to ride the commodity and economic recovery in 2010. Our economics team expects global GDP to rise from - 0.6% in 2009 to 3.3% in 2010. Infrastructure development should revive and thus boost steel demand. As volumes/prices improve, Noble should benefit. Every 1% rise in prices/volume would improve earnings by ~0.5% (Fig. 4, sensitivity analysis). We also maintain OW-30% recommendation on NOBGRP '13s and '15s.

Noble can spin-off an integrated chain as a separate entity to enhance share-holder value. A prime candidate, in our view, is the soybean supply chain, which links farmers in South America to consumers in China and India. Value accretion, could range from S$0.05 to S$0.16/sh. The recent bid for 21.7% of Gloucester Coal, if successful, also provides a platform for it to list its Australian coal assets.

Noble is transitioning from an asset-light trader to an asset-medium, integrated supply chain manager. This should help it secure volumes at lower cost, boosting margins. We see earnings CAGR of 37% over the next three years, driven by tonnage growth of 6-10% and net margin recovery back to near peak levels. Our sensitivity analysis shows a 10bp expansion in margins boosts earnings by 1-3%.

Our PO of S$2 (Gordon growth), equates to FY09E P/E of 14x and P/B of 2.2x, 15% and 20% off peak, respectively. The stock recently corrected due to a place-ment that diluted earnings by 2.4%. We believe this presents a buying opportunity as Noble’s underlying fundamentals and long-term growth potential are strong.

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