Noble shares continue to ride on deal with Cofco
Counter jumps 10% in 2 sessions to pass $1.30, a level last seen in Oct 2012
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Counter jumps 10% in 2 sessions to pass $1.30, a level last seen in Oct 2012
Angela Tan
04 April 2014
Shares in Singapore-listed Noble Group extended their gains yesterday, a day after the Hong Kong-based commodities group said it would sell a 51 per cent stake in its agricultural business to China’s Cofco Corp.
The deal would, in effect, create a joint venture with Cofco, the Chinese mainland’s largest grain trader.
Noble shares closed trading yesterday with a further rise of 4.8 per cent, or six cents, to $1.315, taking its gain to 10 per cent over two days. The last time Noble shares were trading around $1.30 was back in October 2012.
Under the deal announced on Wednesday, the purchaser will pay, on completion, an initial US$1.5 billion for the stake in Noble Agri Ltd (NAL). The final amount to be paid would be equivalent to 1.15 times 51 per cent of the audited book value of NAL for the 2014 financial year. At the end of 2013, NAL’s audited book value was US$2.8 billion and net debt was US$2.5 billion.
Using the initial payment and the FY2013 audited book value as a guide, the deal values the business at around the US$3 billion mark.
The deal would release capital currently invested in the loss-making business, significantly improving Noble’s credit profit and financial metrics.
“We estimate Noble’s residual net debt will be reduced to just around US$1 billion . . . , a significant positive from a credit perspective,” said Jefferies Singapore analyst Abhijit Attavar, who has pegged a new target price of $1.50 a share on Noble.
Fitch Ratings agreed that Noble will be able to deleverage significantly if it completes the proposed stake sale.
“Furthermore, it may no longer need to consolidate NAL’s debt as it may treat NAL as an associate following the sale. Noble reported that NAL’s net debt was around US$2.5 billion at end-2013. This suggests a potential to reduce Noble’s net debt, which stood at US$5.7 billion at end-2013, by up to US$4 billion,” the credit rating agency said.
It added that Noble’s ratings momentum will depend on the return it obtains in the deployment of the sale proceeds and clarity on its eventual leverage level following the completion of the deal, which faces regulatory hurdles from anti-trust bodies in multiple countries.
OCBC Investment Research noted that, on a pro-forma basis, the stake disposal would have contributed some US$302.8 million to Noble’s FY2013 bottom line.
DBS Group Research analyst Ho Pei Hwa noted that assuming the deal had been completed by end-2013, Noble’s book value would have been lifted from US$5.16 billion to US$5.25 billion and net profit from US$243 million to US$546 million.
“This translates to group ROE (return on equity) of 10 per cent versus the actual 4.7 per cent. The non-agri ROE would have been at an astounding 24 per cent if we strip out US$377 million agriculture losses and US$2.8 billion book value.”
Ms Ho has a buy call on Noble and a 12-month price target of $1.53.
Mr Attavar added that the deconsolidation of the agribusiness into a joint venture will bring into sharper focus the high ROE of Noble’s two core businesses - energy and metal trading.
Analysts liked Noble’s asset-light strategy, where the trading group does not have to own upstream assets as long as it can secure the off-take.
Noble said the resultant joint venture will be Cofco’s principal base for sourcing food materials globally, which effectively combines Noble’s broad origination base and pipeline and risk management capabilities with Cofco’s leading access to the Chinese consumer.
The strategy is not entirely new to Noble, which had, in the past, partially sold out of a capital-intensive asset while retaining an associate interest, thereby simultaneously securing production off-take for that asset while boosting ROE as in the Gloucester-Yancoal coal deal.