By Lee Wen Ching
Wed, 10 Mar 2010, 10:34:59 SGT

Commodity players turned in generally satisfactory 4Q CY09 results. Olam Int’l (Olam) surpassed expectations, while Noble Group (Noble) and Straits Asia Resources (SAR) met expectations. Moving into 2010, the operating outlook favours supply chain managers such as Noble and Olam over pure mining plays such as SAR. We expect Noble and Olam to post earnings growth amid normalising commodity markets and as new investments start to pay off. In contrast, we expect SAR’s earnings to contract as lower thermal coal prices weigh on margins and profits. We remain OVERWEIGHT on commodities and maintain our BUY ratings on Noble [fair value estimate S$3.75] and Olam [fair value estimate S$3.36]. SAR remains a SELL [fair value estimate S$1.76].

Good 4Q CY09 earnings backed by firmer margins. Locally-listed commodity players turned in generally satisfactory 4Q CY09 results. Olam International (Olam) surpassed expectations with core 2Q10 net earnings of S$67.8m (vs. our S$54.5m forecast), while Noble Group (Noble) and Straits Asia Resources (SAR) met expectations with FY09 net earnings of US$429.7m and US$133.5m respectively. Earnings of supply chain managers Olam and Noble were supported by firmer gross profit margins amid normalising commodity markets, while in the case of SAR, gross margins were held up by favourable pricing locked in during the commodity boom in 2008 when energy prices hit a record high.

Outlook favours Noble and Olam over SAR. Commodity markets were highly volatile in 2008-2009, but have since stabilised over the last two quarters amid improving demand and supply fundamentals and loosening credit markets. This bodes well for commodity supply chain managers such as Noble and Olam whose earnings are volume-driven. Profit margins have stabilised and both companies have emerged from the downturn in good shape with strong balance sheets and several acquisitions in the bag, which are expected to boost medium term earnings growth. Their rosy outlook contrasts with SAR’s prospects. We expect SAR, whose earnings are price-driven, to post lower profits in 2010 on lower thermal coal prices. The company expects its average selling price to fall to high US$60s–mid US$70s in 2010 from the US$82.14/ton it achieved in 2009. We expect margins and earnings to come under pressure as a result.

Time to reap rewards of recent investments. Medium term earnings growth of supply chain managers will be driven by their enlarged pipelines following recent investments. Noble has already started reaping fruits of its labour - its Energy segment surprised with superior tonnage and revenue in 4Q09 as its expansion efforts paid off. Moving into 2010, earnings should be well-supported as its various capital investments start to pay off (exhibit 1). The same applies for Olam, which acquired several distressed assets during the economic downturn. We remain OVERWEIGHT on commodities as these continue to be good proxies to the global economic recovery. Our preference lies with companies with well-diversified business models, strong balance sheets and proven execution. Noble remains our top pick within the sector. We maintain our BUY ratings on Noble [fair value estimate S$3.75] and Olam [fair value estimate S$3.36] and SELL rating on SAR [fair value estimate S$1.76].