Excerpts from analyst's report

Macquarie analyst:
 Conrad Werner

Iceberg or ice cube? 


 Iceberg Research published a negative report on Noble. It highlights concerns we share, but they are not ‘new news.’ We find that the report has a sensational bias, omits any investment positives, and we don’t think all of its analytical inputs are necessarily valid. In our view, the report fails to make the case for Noble being a “repeat of Enron” and offers no justification for its S$0.10 price target. We see today’s share price reaction as overdone and reiterate our Outperform rating. 

• While we think the two principal concerns highlighted by Iceberg are valid risks to the Noble investment story, but they are not ‘new news’. And while we believe Iceberg’s analysis makes mechanical sense, we wonder if all their inputs are valid:

• 1) Potential Yancoal Australia write-down: As of YE13, Noble is carrying its 13.2% stake in Yancoal (YAL AU, A$0.10, not covered) at US$677m on its balance sheet, or S$0.14 per share. YAL’s stock market value is US$11m, so there is a wide gap. But the shares are thinly traded, which can distort market value. This is one reason why Noble can use a financial model, reviewed by auditors Ernst & Young, to value the stake.

Noble2.15Noble has a trailing PE of 9.2X and a dividend yield of 1.05%. Chart: Bloomberg.With sustained weak coal prices, we have been flagging the risk of further write downs for YAL (2012 carrying value: US$813m). The Noble CEO himself hinted at such a potential outcome at a recent sell side event. Whilst we do not see the full carrying value at risk, there could be a non-trivial impact vis-à-vis Noble’s S$0.98 BVPS (excluding perpetuals). But, again, we have been flagging this risk for well over a year.

• 2) Potential adjustment to cash proceeds from Agri stake sale. As noted at the time of announcement, the final proceeds from Noble’s 51% Agri division stake sale to a COFCO-led consortium will be based on a 1.15x multiple of that division’s YE14 book value. This figure has not yet been disclosed.

In its report, Iceberg focuses on re-measurement gains that Noble reported in 3Q14 to conclude that the Agri division’s book value may have sharply contracted. This would lead to sale proceeds well below the US$1.5b that COFCO has pre-payed on account ahead of the deal’s closure and surely disappoint the market and us. We describe Iceberg’s analysis below, but wonder if the input they use to kick off the chain of calculations is valid.

• Noble gets its chance soon. In a terse rebuttal, Noble clarified that it has seen “no material adverse change since [its last earnings report]”. We expect a more extensive response on the FY14 results call on Feb 26th.

Earnings and target price revision

•  No change.

Price catalyst

•  12-month price target: S$1.60 based on a Price to Book methodology.

• Catalyst: 4Q14 results and analyst call Feb 26th.

Action and recommendation

•  Whilst we share some of the concerns on Noble outlined in the Iceberg report, we see today’s share price reaction as overdone.

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