Excerpts from analysts' report

Morgan Stanley analysts: Charles C. Spencer & Mean Phil Chong

Industry View:
In-Line I Stock Rating: Overweight I Price Target: S$1.50

Shares back to 2008-09 GFC lows
: Investors have wiped >US$2bn off Noble Group (NOBG)'s market capitalization since June 2014. With the shares back to GFC lows, our What's in the Price model suggests that a YoY decline in profits of >US$300mn is already discounted.

This also implies a drop in margins back to levels not seen since the 2008-09 GFC period, and though our bear-case scenario value of S$0.90 discounts a GFC 2.0 scenario, this is not our base case, for the reasons below.

Demand side not like 2008-09: NOBG moves ~200mn tons annually, of which energy products account for 75%, and it makes a GP margin of ~US$8.5/t. However, its earnings are especially vulnerable to declines in volumes and margins together, as occurred during the 2008-09 GFC.

In fact, in 2H08 NOBG's volumes dropped ~25% HoH, coupled with a >50% collapse in margins. Investors today appear to fear a repeat, yet the volume data we track show little evidence that a re-run is underway.

Noble_chart1.15Noble closed recently at 99 cents for a trailing PE of 9.2x and a market cap of S$6.9 billion.  Chart: www.FT.com

Risk exposure not like 2008-09: NOBG's risk exposure and balance sheet leverage today are also not nearly as vulnerable as they were going into the 2008-09 GFC. Both VAR (value at risk as a percentage of equity) and leverage ratios were significantly higher going into the 2008-09 GFC than they are today. Its VAR stood at just 0.21% as of September 2014, the lowest since 2007-08, when it was closer to 2%.

Further, following the sale of its Agri business NOBG's pro forma debt levels have dropped to US$2.9bn from US$6.2bn and its debt maturity profile has been significantly extended. As such, we believe its vulnerability to shocks and impairments is materially reduced.

Attractive risk-reward; management guidance needed: 2015e PE is just ~7x , below its five-year average of 13x, reflecting the above macro concerns. Management will be hosting an analyst briefing in Singapore on 23 January.

If their guidance can help diminish investor concerns, we believe further downside in the shares should be limited.

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