Excerpts from analyst's report

Jefferies Singapore analyst: Abhijit Attavar 

We raise our target price for Noble given the completion of its agri spin-off. We believe this spin-off is a game-changer for Noble's business model as: 1) It will highlight the high ROEs of the energy/ MMO business; 2) give investors a valuation benchmark for the loss-making agri business; and 3) de-leverage the balance sheet significantly. 
While CIC residual holding seems to be a technical overhang, potential share buybacks could be a solution for that. 

Agri spin-off to improve earnings: The agri spin-off will reduce interest expenses at Noble as it will receive US$1.5bn cash for the stake sale as well as an additional US$1.5-2bn as repayment of intercompany loans made to the agri-business which will now be funded by the JV. Noble's reported earnings will also have to bear a lower share of the agri-losses (49% vs 100% earlier). We believe consensus estimates have not fully factored in the impact of these changes and our 2015-16F earnings are 9-12% above current IBES consensus.

noble_chart10.14Noble ($1.28) has a market cap of S$8.3 billion.  A new-look Noble is a high ROE, asset-light business: In our view, the spin-off of the asset-heavy but loss-making agri-business will bring into greater focus the high ROEs of the energy/ MMO businesses (JEFe ROE of 16.5% in 2015F).

We also expect Noble's net debt-equity to drop to just 0.3x in 2015F from 1.0x in 2013. A new-look Noble that is more conservatively geared and generates a high ROE should result in a gradual improvement in investor perceptions.
Is residual CIC holding a technical overhang? Are share buybacks the solution? China Investment Corporation (CIC), a strategic investor in Noble Group since 2009, sold down 300m shares in Noble on Sep 30, 2014. A further sell-down of CIC's stake is a potential overhang on Noble's share price. Whilst we are not privy to the thinking of CIC on its stake, we note that CIC's residual stake is worth just about US$655m at current market prices.

Noble expects to unlock over US$3bn of cash from the spin-off of the agri-business. Share buybacks might offer a potential solution to clearing the overhang while at the same time optimizing Noble's capital structure.
We raise our target price for Noble from S$1.50 to S$1.80 per share, based on a sum-of-parts analysis, valuing the agri-business at transaction value of the COFCO deal and the energy/ MMO businesses at 2015F P/E of 10x. Our TP implies a 2015F P/B of 1.5x, below Noble's 5-year average P/B of 1.7x. Key risks 1) Potential write-down of Yancoal stake, 2) Reinvestment risk.


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