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Noble Group Limited - Did it sell the agriculture business at right price - which of the brokers is right?

After failing to spin off its agriculture business in 2011 it has now again plans for an IPO after divesting majority stake to COFCO. The question still remains whether this segment deserves better valuations.

15/4/2014 – Noble Group's shares have been trading below book value since it reported its first quarterly loss in 2011 and CEO Ricardo Leiman resigned.

But a recent announcement has possibly reversed its valuations.

It is selling its 51% stake in the agricultural business to a consortium for US$1.5bn in cash.

The agriculture division has been a key swing factor for its earnings leading to more pressure on its balance sheet.

Noble highlighted in the FY13 annual report that it will reduce assets and improve efficiency.

It will book a gain of US$64.8 mln on the transaction.

The buyers include COFCO, a Chinese state-owned grain trader, and HOPU Investment, a private equity fund.

The agriculture division has been contributing less and less to revenue.

It accounted for about 28.1% in FY08 but fell to 15.8% in FY13.

Its operating profit, as defined in the annual reports, has been falling since FY11.

In fact, it made an operating loss of US$99.7 mln in FY13.

The chart below illustrates the decline in operating margin.



It is not generating enough revenue from its agriculture assets (calculated as asset turnover ratio = revenues/assets) and it has more liabilities than other segments.

After looking at the chart below there is no doubt that the agriculture division is weighing on the company's performance.

It has underperformed versus other segments, and it has more liabilities.



Moody's Investors Service has affirmed Noble Group Limited's Baa3 issuer and senior unsecured bond ratings and revised the outlook to positive from stable.

It has taken these rating actions on the expectation that the transaction will have a positive impact on Noble's credit profile over the next 12 to 18 months.

While analysts believe that the deal is positive for Noble, Maybank Research believes that the timing is not right as it could have got a better valuation in the future.

Bullish analyst report

Bullish analyst report
Bullish analyst report



DBS Vickers Research says the move will allow Noble Group to focus on its more profitable Energy and Metals, Minerals and Ores (MMO) segments.

The deal allows COFCO to bring food supply volumes into China without the pain of having to go through various pipelines.

As for Noble, the deal will allow access to the Chinese consumers and add volume to its trading business.

The analyst believes that reducing exposure to this segment will improve its balance sheet & return on equity (ROE).

For instance, had the deal been completed by the end of 2013, its book value would have been lifted by almost US$100 mln to US$5.25 bln and net profit would have more than doubled to US$546 mln.

This translates to group ROE of 10%, versus the actual 4.7%.

Hence, it upgraded the stock from HOLD to BUY and raised its target price from S$1.09 to S$1.53.

Bearish analyst report

Bearish analyst report
Bearish analyst report



Maybank Research says the tie-up is strategically positive for Noble.

The group will act as COFCO’s major buyer of soft commodities like wheat and soybean.

Net gearing may fall to 74% from 89% in FY14 if it uses US$1 bln to repay its debt.

However, the analyst does not think the timing is ideal as Noble could have got a higher valuation in future.

Selling the stake now would result in an earnings dilution of 6% in FY15 and 9% in FY16.

It expects the agriculture division to turn around from this year.

In its view, COFCO’s US$3 bln valuation underprices Noble’s agriculture business, even though it is at a 15% premium to book value.

It believes Noble’s sugar and soybean crushing assets alone should be worth around US$3 bln.

Adding palm oil and other trading assets, the whole division should be worth at least US$3.5 bln to US$4 bln.

Hence, Maybank Research maintained its HOLD rating with a target price of S$1.13.

HSBC Research downgraded the stock from NEUTRAL to UNDERWEIGHT with an unchanged target price of S$1.08.

It says the deal allows the company to partially exit the most asset-heavy part of its business, where the group has struggled to make headway.

However, the underlying structural issues in its agriculture business, including infrastructure bottlenecks in Brazil, underperforming sugar assets and thin soybean crushing margins in China, will remain in the medium term.

The analyst does not expect any special dividend from the sale of the agriculture business.

Hence, it is too early to re-visit earnings estimates.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question
Question

1. Did it sell the agriculture business at the right price?

Noble's revenue from the agriculture division has remained volatile for many years.

This is despite a 57% increase in agriculture assets to US$7.3 bln in FY10.

All thanks to availability of cheap money and M&A opportunities during the Global Financial Crisis.

But this strategy, among others, didn't work in favour of Noble.

Revenue has not grown at the same pace.

It witnessed a 65.2% growth in revenue to US$12.2 bln in FY10, and 50.4% in FY11.

But it fell 15.7% in FY12 and was flat at US$15.5 bln.

Low sugar prices and logistical issues in its Latin American operations led to Noble's agri-business reporting a loss in 2013.

After witnessing a decline in operating income it turned negative in FY13.

But couldn't these issues be resolved? Weren't they temporary in nature?

The deal with COFCO is valued at 1.15 times of the audited book value of its agriculture division as at December 2014.

Question
Question

2. Why did it not wait for the agriculture division to turn around?

Is it finding more opportunities in the MMO and Energy segments?

Total number of questions in the full story: 13)

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message).


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