Noble Profit Triples as Volatility Increases Trade Margins

May 16, 2014 5:20 am ET

(Updates with closing share price in fifth paragraph.)

May 16 (Bloomberg) -- Noble Group Ltd., Asia’s biggest commodity trader by revenue, said first-quarter profit more than tripled as higher price volatility helped boost margins and losses from its agriculture unit narrowed.

Net income was $152.3 million in the three months ended March 31, compared with $41.3 million a year earlier, the Hong Kong-based company said yesterday in a statement. Sales declined 7 percent to $18 billion.

Noble is allocating more resources to its more profitable energy and metals units and selling control in the agriculture division to China’s Cofco Corp. for $1.5 billion. The food unit booked losses last year due to weak oilseed crushing margins, helping push profit down 48 percent in 2013.

“In addition to strong underlying profitability, the agri disposal is likely to be a significant catalyst for the stock with potential debt reduction of up to $4.0 billion, and earnings upside,” Ephrem Ravi, an analyst with Barclays Plc in Hong Kong who has an overweight rating on the shares, said in a note today. Without the agribusiness on its books, Noble’s profit may rise by 25 percent, he said.

Noble, whose second-largest investor is sovereign wealth fund China Investment Corp., rose 3.3 percent to S$1.265 at the close in Singapore. The stock is up 18 percent this year, outpacing the 3 percent gain in the city’s benchmark Straits Times Index, and the second-best performer in the index in the past 12 months.

More Volatility

The company has added traders to cover metals, liquefied natural gas, and power from rivals including Bank of America Corp. and Goldman Sachs Group Inc. as it takes advantage of banks exiting commodity trading due to regulatory pressures.

“Volatility is good for us,” Chief Executive Officer Yusuf Alireza said on a conference call yesterday. “When there is more volatility and less players, because some of the banks are out of the space, people would just pay us more to do that core business and manage that credit markets and operational risk.”

Using cash from the Cofco deal to pay down debt, Noble can enhance its capacity to fund growth in energy and mining, Chief Financial Officer Robert Van Der Zalm said on the call.

The Cofco transaction may close at the end of the third quarter or the start of the fourth quarter, Alireza said, adding that there were no regulatory approval concerns surrounding the deal.

‘Margin Opportunities’

Profit improved last quarter after a rise in commodity price volatility increased “margin opportunities,” which was reflected in Noble’s Value at Risk ratio rising to its highest level since the summer of 2012, the company said.

Operating income margin rose to 2.77 percent from 1.98 percent a year earlier. The energy unit’s margin jumped to 2.91 percent, helping Noble post record operating profit for the business partly on higher ethanol sales, the company said. Margins at its metals unit rose to 2.42 percent, from 0.31 percent a year earlier on record aluminum premiums.

Net losses from agriculture assets narrowed to $78.8 million in the quarter from $180.4 million a year earlier, the company said. This was helped by stronger harvests in Argentina.

“It’s still not where we want it to be,” Alireza said, referring to the agriculture unit. “Whereas some of the assets performed poorly, our physical franchise in terms of moving the products around the world did well with reasonable margins.” The sugar unit also improved, he said.

As Noble moves its agriculture assets into the Cofco- controlled venture, the trader is able to cut its working capital needs, freeing more cash for investments, and lowering debt and inventories.

Working capital dropped to $2.76 billion in the quarter from $4.28 billion a year earlier. Total debt fell 16 percent to $5.19 billion.