Noble - Riding the wave of recovery

Ripe for recovery. Global economic trends have improved in recent months and so has the outlook for Noble Group Ltd (Noble). The worst of the recession appears to be behind us with 2Q09 GDP figures showing QoQ improvements across several countries. These trends are in line with the International Monetary Fund's (IMF) projections, which predicted a bottoming out of global economies by 2H09 (exhibit 1). Credit markets have also started to thaw, helping to boost global trade flows. Noble, being a global commodities supply chain manager, will be a key beneficiary of the economic recovery.

Metals and Energy could spring positive surprises. Noble's Metals and Energy divisions could surprise on the upside given the resurgence of demand and prices in 2Q09 (exhibit 2). Metals and energy typically displayhigh sensitivity to real economic conditions, and we expect these segments to lead the economic recovery. Flow through effects of pump-priming initiatives, coupled with inventory re-stocking, has supported global activity in recent months. Going forward, robust demand from emerging economies such as China should continue to fuel demand for commodities.

Gloucester acquisition: a strategic move with earnings accretion. We have raised our FY09 and FY10 estimates marginally to reflect earnings accretion from Gloucester Coal. Noble has successfully gained control of Australia-listed Gloucester Coal with a 87.7% stake. This acquisition notonly boosts the group's earnings, but more importantly, secures Noble's strategic long term access to coal supplies. The acquisition is in line with Noble's strategy of increasing its assets, forms a good fit with the group's existing product portfolio, and should be easily digestible as we estimate that the acquisition cost formed no more than 2.5% of Noble's 1Q09 cash holdings.

Improving outlook; upgrade to BUY. Noble has consistently maintained a healthy financial position and managed to grow its volumes despite challenging operating conditions in 1Q09. The group will be announcing its 2Q09 results on 13 Aug 09, during which we will be paying attention to its segmental tonnage performance and balance sheet health. We rollover our valuations to blended FY09/10 earnings and raise our peg to 13x (from 10x), similar to levels seen in the 2003 recovery, bringing our fair value estimate to S$2.26 (previously S$1.62). We upgrade Noble to BUY on improved economic outlook. While we remain mindful of the risk of a double dip in commodities demand, the expected economic recovery in 2010 provides support for Noble's medium term performance.

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