Noble

Noble: big negative surprise in 3Q11 results.
Noble reported a net loss of US$17.5m, its first quarterly loss in more than a decade. Consensus estimates were for Noble to post net profit of US$167m. Expect the market’s disappointment to be amplified, as mgt had in the past, a track record of effectively communicating its business expectations.

The Agri division gross profit declined 59% qoq, largely driven by high levels of defaults by cotton suppliers and customers in the face of cotton price volatility. Noble continued to honor its own delivery contracts with spot purchases resulting in tighter margins. Mgt said it is pursuing arbitration against its suppliers/ customers while switching to shorter dated contracts to mitigate these risks going forward. In addition, soybean crushing margins in China remained weak, and sugar crop profitability was affected by dry weather in Brazil, leading to lower sugarcane yield impacting utilization rates.

Energy division gross profits were also below expectations (declined 34% qoq), pressured by a sharp decline in carbon credit prices.
Meanwhile, the oil, gas, and power division saw a 14% yoy increase in volumes, while coal volumes also grew 14% yoy driven by strong physical origination in Indonesia with off-take opportunities.

Recently hired CEO Mr. Ricardo Leiman will step down due to personal reasons, and Richard Elman, the Chairman and founder, has been appointed Acting CEO. The CEO resignation adds to uncertainty, especially as the Group prepares to spin off its agri-business.

Expect a slew of downgrades from the Street, given the emergence of succession risks, and counterparty risks amidst commodity price volatility.
HSBC downgrades to Underweight from overweight, slashes TP to $1.41 from $2.06.

Olam may face some pressure today as well, given its sizeable cotton exposure. The Industrial Raw Materials division, which includes cotton, along with wool, wood pdts, rubber and fertilizers, contributed 24% of total revenue in FY11.