Noble Group Limited - MANGEMENT REPLY: When will its agriculture division turn around?

22/8/2013 – Analysts have responded to Noble Group's Q2 results with downgrades, saying its agriculture segment continues to be a drag on its overall profitability.

OCBC Research has downgraded it to a SELL and dropped its price target from S$1.09 to S$0.76 – a level not seen since early 2009.

OSK Research also downgraded the stock to NEUTRAL with a lower target of S$0.85.

DBS Vickers Research has maintained its HOLD rating with target priced lowered to S$0.93.

Given the weak agriculture segment in Q2 and challenging outlook, the analyst has lowered its FY13-FY14 gross profit per tonne assumptions for this segment.

However, CEO Yusuf Alireza believes that the agricultural business will be able to focus on ensuring its newly completed assets achieve operating excellence in H2 FY13 and FY14.

The company just announced earnings for Q2 FY13:

Revenue: +5% to US$25.4 bln
Profit: -66% to US$67 mln
Cash flow from operations: (US$43.2 mln) vs US$1.3 bln
Dividend: Nil vs Nil

Noble's agriculture unit reported a US$53.7 mln operating loss from supply chain, compared with an operating income of US$51.1 mln a year earlier.

Its net profit margin fell to 0.25% from 0.80%.

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

Question

1. How much longer will the agriculture segment continue to drag its profitability?

The agriculture segment saw record tonnage as a result of the ramp-up in operations, but it continued to post a significant operating loss of US$120.3 mln in H1.

Management attributed it to several factors such as low sugar prices, limited access to port facilities in Brazil, low ramp-up of its grains business in Brazil and poor crush margins in China.

While management remains upbeat about its long-term prospects, OCBC Research says profitability may continue to take a hit in the near term as long as sugar prices remain around current levels of US$0.16/pound.

Sugar has slumped 15% this year.

Question

2. Does Noble expect sugar prices to increase in Q3?

Sugar operations in Brazil remain very challenging given the low sugar prices but are expected to improve going into the peak season in 3Q, according to DBS Vickers Research.

The house says Noble has adjusted production mix to increase ethanol production given the change in the structure of ethanol pricing in Brazil.

This should help to partially ease the sugar supply pressure with more sugarcane diverted into biodiesel production.

But Sugar prices have to go up from the current 16 to 17 US cents/pound for Noble's sugar mill to be profitable.

Question

3. Will MMO segment keep up the momentum in margins?

The Metals, Minerals and Ores (MMO) segment saw operating profit margin rising 0.4%-points to 1.2% due to high aluminium premiums.

However, DBS Vickers Research thinks these premiums which are unlikely to sustain amid industry oversupply.

Premiums paid by aluminium users rose in recent months as warehouse operators offered incentives to attract the metal into storage, forcing consumers to compete for the metal.

Management Reply As the vast majority of the questions that you are requesting that we respond to would require us to furnish you with potentially price sensitive non public information we cannot accede to your requests.

The passage of such information is prima facie a criminal offence in many jurisdictions.

There is one point I can address however. The price of sugar in Brazilian real has risen sharply this year.

We thank management for its response


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