Correction continues, adding more

Following the slump in US equity markets overnight, Singapore stocks continued to slide today. Having sold out of lower-conviction stocks in January, the correction in stock markets presents a "welcome" opportunity, and we added 2000 shares of Noble Group (at $2.00) and 1000 shares of Capitaland ($3.29) today amidst the selldown.

Noble invests in palm oil

Noble invests in palm oil origination in Indonesia

14 June 2010, Hong Kong

Noble Group (SGX: N21), a global supplier of agricultural, energy, metals and mineral products, has acquired a 51% stake in PT. Henrison Inti Persada ("Company"). The Company intends to develop approximately 32,500 ha of land for palm oil production in Sorong Regency, West Papua Province, Indonesia.

The transaction is Noble’s first project in the oil palm sector and establishes a strong platform for the Group to expand and increase its investments in this area in the future. The investment enables Noble to expand its edible oil supply chain and secure a continuous flow of crude palm oil.

The Company is to be registered as a member of the Roundtable on Sustainable Palm Oil (“RSPO”). The RSPO are an organisation whose membership is made up of, amongst others, palm growers, palm oil producers, retailers, investors in the sector and environmental/conservation NGOs. The RSPO promotes the production of palm oil in a sustainable manner based on economic, social and environmental criteria.

“We focus our investments on areas that are synergistic with our businesses both in terms of product and geography,” said Noble Group Executive Chairman Richard Elman. “This move into palm oil plantations will complement our global agriculture and energy businesses. Our operating experience in Indonesia should prove to be an asset in helping us manage this and future projects.” He added, “With increasing convergence between agriculture and energy, this investment is a clean fit for the Group’s diversified portfolio.”

This transaction is not material for the purpose of the Singapore Exchange Listing Rules.

Noble Group today announced its investment in palm oil, further diversifiying its agriculture and energy business by acquiring a 51% stake in PT. Henrison Inti Persada (HIP). HIP is one of four palm oil plantation companies which are under the Kayu Lapis Indonesia Group. While the 32,500 ha plantation to be developed may be small in comparison to listed peer's Golden Agri's 427,253 ha (more than 13 times the size!), it will still provide decent revenue potential.

 

A hectare of oil palm can yield between 3.5 to 5 tonnes of crude palm oil a year, so going by this assumption, HIP's site has the potential to produce between 113,750 and 162,500 tonnes of CPO a year, generating revenue of US$84 to US$120 million each year, based on current CPO spot prices of about US$741 a tonne. As a gauge of the value of this investment, a simplified analysis of First Resource's balance sheet yields biological assets carried at US$1,065,800,000; based on 113,000 ha of plantations, this works out to about US$5,000 per hectare, which indicates that PT. Henrison Inti Persada's plantation could be worth about US$162 million. Granted, since the plantation will require further investment for development (it is not yet plantable, and further investments in processing plants will have to be made), Noble's initial investment is likely only a fraction of its estimated US$80 million share.

 

  

 

Noble buys stake in USEC Inc

Noble Group today reported that it had purchased 5,848,940 shares of USEC Inc, a 5.13% stake in the company. The purchase cost was US$30,194,176.53, which works out to US$5.16 a share, an 8.2% premium to USEC's close of US$4.77 on Monday. USEC Inc is in the nuclear energy business, and supplies low enriched uranium (LEU) to commercial nuclear power plants in the United States and internationally.

STI down 11.1% from recent peak, bought some Noble Group shares

The STI was 1.9% lower today, after weakness on Wall Street last night. The Singapore stock market has declined over 10% from the recent peak in early April, a sharp drop in just five weeks. Considering the risks known at present, most of them stem from European debt problems and the collateral damage often simplified in the media as the "Greek contagion". 

While throwing into question the risk-free rate of certain developed European economies is certainly unprecedented, systemic risks have been substantially reduced after the huge bailout package put together by the EU and the IMF. We are investing on the basis that a credit market seizure on the scale following Lehman's collapse in late 2008 will not occur again, which means the risks for Singapore stocks will largely be associated with lower levels of consumer demand. This is yet another indication of the growing disparity between emerging economies and developed ones, and Singapore is fortunate to have companies positioned to benefit from emerging market growth, without the tricky corporate governance issues.

The market correction is painful, yet inevitable and long-awaited. Wilmar was sold down yesterday on fears that the Indonesian government would take legal action to reclaim certain unauthorised tax rebates that the company had received over the past three years. The stock has already corrected more than 20% from its recent peak to levels last seen in July 2009, a worthwhile punt, but we will have to study the company in greater detail before making an investment decision.

In response to the market sell-off, we added $10,000 in new money today to the overall portfolio (the portfolio is almost fully invested). With some of the proceeds, we purchased 1910 shares of Noble Group, (one lot at $1.60, 910 shares  at an average cost of $1.624) at  to top up our holdings to 5000 shares. Noble recently did a 6 for 11 bonus issue, which meant that we held 3090 shares from the original 2000. With the shares falling as much as 9.4% this morning (with no negative company-specific news), we decided to add to our position in the stock.  

 

Gloucester-Macarthur merger: Noble shareholders vote "No"

19 April 2010, Hong Kong


"Noble Group wishes to announce that the merger proposal between Macarthur and Gloucester was soundly defeated by shareholders in a vote held in Hong Kong at 2.30pm today."
 

The Noble-Peabody-New Hope tussle for Macarthur Coal took another strange twist today, as Noble shareholders voted down the merger of Gloucester and Macarthur, a deal which would see Noble own almost a quarter of the new entity. Considering that the proposal was "soundly defeated", this strongly suggests that Noble's management has other plans in mind (Richard Elman's trust still owns a controlling stake while CIC would not jeopardise the company's expansionary plans, not after acquiring such a substantial stake).

 

Certainly, after being so close to sealing the deal, there is no way that Noble will give up Macarthur (and its assets) so easily, and the voting down of the proposal simply indicates that a new strategy is in place, perhaps a hostile one. Noble owns 30% of Middlemount Mine, a significant asset in the Macarthur portfolio of mining assets, and has the option to raise this stake to 50% for A$100 million. Also, Noble owns 10% of the Monto project, of which Macarthur remains the majority owner. There could also be options attached to Noble's stake in Monto, which upon exercising could reduce the attractiveness of  Macarthur to Peabody (Noble highlighted its interest in both projects in a warning note directed at Peabody on 5 April, saying its quiver is "far from empty").

 

We look forward with great excitement to see what Noble has up its sleeves in this game of M&A chess.

Sharebuilder purchases for today (19 Apr 2010):
32 shares of STI ETF at $2.9989, 20 shares of Fraser and Neave at $4.84

Strong rebound in March 2010

The portfolio rebounded strongly in March, gaining 4.9% (net of an accrued performance fee of 20% based on a 6% annual targeted return), bringing NAV to $1.023, up 2.3% YTD. In comparison, the STI on a total return basis gained 5.2% in March, and is essentially flat YTD.

On a percentage basis, Best World was the strongest performer, with a 36.2% monthly return. The announcement of expansionary plans in the Phillipines was enough to incite trading in the stock. Renewed investor interest in Jardine Strategic Holdings sent the stock rising 21% for the month, a huge boost to the overall portfolio (JSH is our largest single position in the portfolio). As previously mentioned, we view the underlying businesses as highly attractive in their own right, and the parent holding company simply offers the opportunity to purchase the whole basket at a substantial discount to market value. Another notable performer was Wells Fargo, which gained 14% for the month (also a substantial holding for us). Worries over financial reform in the US appear to have subsided for the moment, and investors are beginning to focus on P/E multiples for bank valuations, instead of book value. Wells Fargo currently trades at a forward PE of 11.3X, which leaves much upside potential based on a PE multiple re-rating alone.

Noble was the chief laggard in the portfolio, as concerns over a director's share sale and uncertainty over the merger of subsidiary Gloucester Coal and Macarthur Coal weighed on stock performance. US coal giant Peabody recently made a takeover offer for Macarthur Coal on the condition that its proposed merger with Gloucester Coal does not go through. At stake for Noble is a near 25% stake in the consolidated Macarthur, which is poised to benefit from steel production in China. While uncertainty still lingers, a second refuted bid by Peabody suggests that Noble has the upper hand, but we will be watching developments closely over the next week or so (Macarthur shareholders vote for the Gloucester-Macarthur merger on 12 April).    

BEST WORLD 36.2%

JARDINE STRATEGIC 21.0%

Hotung Investment Holdings 18.3%

FRASER AND NEAVE 16.9%

WELLS FARGO 14.0%

KEPPELCORP 12.2%

GUOCOLEISURE 8.7%

Capitaland 6.9%

STI ETF 6.1%

CAMBRIDGE 4.5%

SPH 3.0%

CAPITAMALL 1.7%

BERKSHIRE HATH-B 1.3%

ASCENDAS I-TRUST 1.0%

SGX 0.3%

WBL Corp -2.8%

TAT HONG -3.3%

NOBLE GRP -3.5%


$6,000 of new money was added into the portfolio, resulting in the creation of 5865.10 new units on 31 March 2010.

Portfolio flat in February

Our portfolio dipped marginally by 0.3% in February, bringing year-to-date performance (as at end February 2010) to -2.5%. On an NAV basis, the portfolio ended Feb 2010 at $0.975. In comparison, the STI (total return) gained 0.3% in February, but has declined 5% on a year-to-date basis.

Noble Group was the strongest performer, returning 10.1% as sentiment improved on commodity plays while Berkshire Hathaway benefited from the increased liquidity following a 50 for 1 share split. Tat Hong was the worst performer, losing 8.6% as investors discounted a weaker outlook for crane demand and increased costs for the construction sector after announcements of increases in foreign worker levies in the 2010 Singapore budget.

Stock Feb'10 Returns (%) in SGD


NOBLE GRP 10.1%

TAT HONG W130802 9.1%

BERKSHIRE HATH-B 4.8%

CAPITAMALL 4.7%

FRASER AND NEAVE 2.4%

KEPPELCORP 0.5%

SPH 0.3%

JOHNSON & JOHNSON 0.2%

BEST WORLD 0.0%

WBL Corp -0.2%

STI ETF -0.4%

ASCENDAS I-TRUST -0.5%

GUOCOLEISURE -1.6%

Capitaland -2.1%

JARDINE STRATEGIC -3.1%

CAMBRIDGE -3.3%

SGX -3.5%

WELLS FARGO -3.9%

TAT HONG -8.6%

Portfolio down 2.2% in January; commodity price impact on Noble's earnings

Equities generally had a rather poor January, leading to a 2.2% decline in the portfolio for the month. Assuming the portfolio started 2010 at $1.000, each unit ended the month at $0.979. Still, this was significantly better than the 6% decline in the Straits Times Index, or the MSCI World's 4.3% decline.

BERKSHIRE HATH-B	+16.5%
WELLS FARGO	+5.5%
SPH	+3.5%
CAMBRIDGE	+2.2%
KEPPELCORP	+1.7%

CAPITAMALL	-6.1%
TAT HONG	-6.2%
GUOCOLEISURE	-7.9%
CAPITAMALLS ASIA	-8.7%
NOBLE GRP	-11.4%

Berkshire Hathaway was the outstanding performer, jumping 16.5% as investors piled into the stock in anticipation of its addition into the S&P 500 (replacing Burlington Northern). Wells Fargo turned in a respectable performance (+5.5%) while SPH also gained on better-than-expected profits.

Noble Group was the worst performer, falling 11.4% as commodity prices wavered. Noble's dependence on commodity prices is often overestimated by most investors, who choose to lump the company together with other commodity producers who suffer a large hit to earnings when commodity prices decline. Noble's business model involves hedging inventory as it is passed along the supply chain, which involves little exposure to commodity prices. 

Noble's earnings hardly fluttered as commodity prices went from boom to bust in the 2008-2009 crisis, indicating a relatively low dependence on an appreciation in commodity prices. High prices require Noble to post more collateral to hedge, a drain on cash resources, which means that Noble would prefer lower, or at least less volatile commodity prices.

Despite the sharp declines, the stock is not terribly cheap as the market attempts to factor in strong future earnings growth (Richard Elman has been quoted as targeting US$1 billion in profit sometime over the next few years). The company has excellent management and is extremely focused on shareholder value, which has resulted in the stock being the best performer on the STI in 2009. As one of the few companies in the STI with truly strong earnings growth potential, we will want to accumulate more Noble shares, but will wait patiently for a better entry level to add to our existing position.

Initial Portfolio Holdings

On 31 December 2009, we held stocks worth $104,789.07, along with cash of $4,879.03.