Why Noble's agribusiness is back on track after 2 tumultuous years

New plants set to open in Brazil, Ukraine and South Africa.

According to CIMB, Noble’s agriculture segment has been through two tumultuous years. After getting hit by industry-wide defaults by cotton farmers in 2011, profits from this segment were hammered further in 2012 by a confluence of unfortunate events, including wildly volatile soybean and corn prices, droughts in Argentina which hurt origination volumes and poor soybean crush margins in China.

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Weak sugar prices weighed further on the new sugar mills’ profitability. These sent the agriculture segment’s gross profits to a record low of US$180m in FY12.

We expect a better showing in FY13 for several reasons. First, the crop outlook in South America is improving, suggesting a normalisation of trade flows.

Second, the ramp-up of its sugar mills in Brazil will help to lower unit production costs, supporting margin improvement even if sugar prices remain dull. Management stressed that its mills are profitable even with sugar prices languishing at current levels of around 18 US cts/lb.

It is confident of operating in the bottom quartile of the Brazilian industry’s cost curve once these mills are ramped up to optimal utilisation, projected to be achieved by FY14.

Third, Noble is expanding its oilseed processing capacity from 7Mtpa to 10Mtpa by opening new plants in Brazil, Ukraine and South Africa, which are expected to be operational in FY13.

Fourth, industry players are generally taking the view that China’s crush margins are past their trough, implying less of a drag in 2013 even if margins do not stage a strong rebound.

Peers such as ADM, Bunge and Cargill are generally optimistic about their agribusiness’s 2013 outlook, citing tight global supplies coupled with restocking of grain and oilseed stocks to meet growing demand. Pockets of soft spots could nevertheless arise from weak ethanol and sugar prices.

We share Noble’s view that profits should normalise in FY13. Earnings will be back-loaded given the seasonal lull of soybean harvests in 1Q.

Furthermore, sugar production peaks in 3Q, further skewing profits towards the later part of the year.

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