Noble Group Ltd: Our preferred pick within the commodities sector

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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