Noble Group Ltd: 2Q09 in line, outlook improving

2Q09 results within expectations. Noble Group Ltd's (Noble) 2Q09 performance was in line with expectations. Revenue eased 31.2% YoY to US$7.2b along with lower commodities prices, while net profit doubled to US$248.8m thanks to a one-off revaluation gain arising from the Gloucester acquisition. Stripping away this gain, net profit would have contracted by 22.6% to US$94.8m. Sequentially, Noble's performance improved with revenue gaining 18.0% and net profit expanding by 5.1%. The operating environment displayed signs of normalising in 2Q09, leading management to adopt a more confident stance as it heads into 2H09.

Growth in market share. 1H09 tonnage grew 19.4% YoY, demonstrating Noble's ability to grow its market share despite harsh operating conditions. With the exception of Agriculture, all other segments reported higher tonnage. The group's market share gains put it in good stead to leverage on the economic recovery when demand for commodities strengthens. In particular, we expect tightening energy markets to drive Noble's growth in 2H09. Higher energy prices have already helped to buoy the energy segment's gross profit margin, which expanded to 2.3% in 2Q09 from just 0.9% in 1Q09.

Blip in MMO does not taint outlook. A blemish in its 2Q09 results came from the Ferro Alloys division's losses - the result of a collapse in prices. This resulted in gross profit margin contraction for the Metals, Minerals & Ores (MMO) segment. Nevertheless, management remains confident of the MMO segment's outlook, citing strong performance from all other divisions coupled with robust tonnage growth. Normalising economic conditions and sustained demand from China will support its performance going forward.

Balance sheet remains healthy. Noble's conservative balance sheet management has enabled it to tide through volatile commodity markets, and will equip it with financial flexibility to emerge stronger from the downturn. Inventory hedge ratio remained healthy at 94%, a slight improvement over the 93% recorded in 1Q09. The group's inventory levels rose from US$1.8b to US$2.0b, and according to management, this is a precursor of improving conditions ahead. Adjusted net gearing came in at a conservative 0.15x (vs. a net cash position in 1Q09), and credit facilities remain ample at US$3.4b.

Improving outlook; maintain BUY. We expect Noble to be a key beneficiary of the global economic recovery. Improving demand and supply fundamentals, the resurgence of commodity prices and market share expansion will drive its 2H09 performance. Valuations remain undemanding at 12.2x FY09 PER (vs peer Olam's 27.3x). We maintain our BUY rating and S$2.26 fair value estimate.

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