What will hold back a Noble Group ascent?

Its agriculture segment could disappoint and dampen an expected earnings recovery, says DBS.

Oilseeds processing, in particular, seems to be the marginal waterloo of agricultural firms worldwide, and DBS thinks Noble will be hard-pressed to avoid the same squeeze.

Here's more from DBS:

4Q11 recovery. We expect Noble to book 4Q11 core profit of US$164m (-25% y-o-y), reversing the loss of US$17.5m in 3Q11. Earnings recovery is expected to come mainly from (1) reversal of 3Q11 mark-to-market losses post rebound in commodity prices/Brazilian Real in 4Q11; and (2) absence of exceptional losses/writedowns seen in 3Q11 due to industry-wide defaults in cotton and collapse of carbon credit market.

Potentially soft Agriculture results. Recent results from Noble’s peer group (ADM, Bunge and Wilmar) indicate that global oilseeds processing margins remain weak. San Martinho (one of Brazil’s largest sugar processors) for example, reported a 5% q-o-q drop in EBITDA on lower cane volumes. Noble’s Agriculture business could hence report softer-than-expected 4Q11 results. Assuming operating profit/MT for the Agricultural segment is US$10 versus our current estimate of US$12.20, Noble’s 4Q11 earnings could come in at US$115-125m, below our estimates.

4Q11 rebound is already priced in. While we expect Noble’s FY11 results to be weak, we think the share price already reflects FY12 outlook for higher volumes across most businesses, offset by lower prices. No further write offs/ defaults are expected. Hence, key drivers of a better outlook are (1) recovery in global economy in 2H12, (2) rebound in Agriculture (after La Nina last year) and Energy volumes and (3) gradual recovery in margins as buyers restock.