Profile of Noble Group

Taken off SCMP.COM

Quiet achiever Noble builds global footprint with stellar growth rate

Howard Winn


Noble Group founder and chief executive Richard Elman is determined to double the size of the company every five years.
Noble Group is the largest Hong Kong company in terms of revenue, but it is probably better known in Brazil or Argentina, where it has large agriculture operations.

Its profile is a good deal lower than those of many luminaries of the Hang Seng Index, since apart from a brief spell between 1994 and 1996, it has not been listed in Hong Kong and does virtually no business here.

Since listing in Singapore in 1997, where it has been one of the best-performing stocks over the past 10 years, it has made more of a mark. Its market capitalisation was just under US$100 million when it listed and has since grown to US$8.5 billion.

“There wasn’t much interest in industrial companies in those days. People were far more interested in real estate,” said founder and chief executive Richard Elman.

It is nevertheless one of Hong Kong’s few truly global businesses, with 100 offices in 40 countries and 10,000 employees worldwide, of which 450 are in Hong Kong.

The company is a market leader in managing global supply chains of agricultural, industrial and energy products. It sources products such as soyabeans, sugar and rice in low-cost producers such as Brazil and Argentina and transports them to high-demand regions the other side of the world, such as the mainland.

But Noble adds value – and captures the margin – by developing key assets along the supply chain, such as ports, processing plants, ships and financial services. Its agriculture business accounted for 27 per cent of revenue last year.

The company employs a similar strategy for metals, minerals and ores and manages the sourcing and supply of strategic raw materials for industry, such as iron ore, ferro alloys and aluminium and steel. This business division accounts for 17 per cent of revenue. Noble is also a big player in the energy business, which provides 51 per cent of its revenue. It invests in mines and ports and transports coal, coke and clean fuels such as ethanol.

Since 2005, Noble has invested more than US$1 billion in assets to support its supply pipelines.

“ In keeping with our hands-on approach, we rarely acquire businesses. We build our own ports and terminals, and we learn how to run crushing plants. There are no short cuts,” its 2008 annual report says.

There are few comparable companies in the world with such a high level of integration over such a range of commodities. Swiss firm Glencore International is one, and another is United States firm Cargill.

“We set ourselves a target of 20 per cent growth every year, and we manage to hit it,” said Elman.

As an indication of the strength of the business, it maintained this rate of growth right through the turmoil in the financial and commodities markets of the past year and grew shareholders’ equity 23 per cent in this year’s first nine months.

Although revenues for the period fell 28 per cent, largely as a result of lower commodity prices, net profit was a record US$471million. How did this happen? “We learnt some very substantial lessons during the 1997 Asian financial crisis,” said Elman. “Don’t overleverage the company, and don’t take on unsuitable long-term debt, by building plants, for example, with short-term finance.”

As a result, Noble went into the recent crisis with a very strong balance sheet and high levels of cash.

“We continued to trade when others weren’t there. We took market share as other people disappeared from the market owing to cash constraints. But we could be aggressive and continue to grow the company.”

One of the keys to Noble’s success is the attention it gives to risk management. Richard Elman, chief executive, Noble Group There is a risk dashboard on each executive’s computer screen that is updated every day with a range of metrics on the company’s underlying exposures.

Elman said this attention to risk enabled the company to see looming reversals in the commodities markets in last year’s second quarter, which enabled it to reduce its exposure to counterparties and extend programmes that hedged the company’s assets.

“We understand risk – we understand how to value it and know how to sell it – we buy it and move it on as fast as we can,” he said.

He said for every big transaction there were about 45 actions that needed to be taken, meaning that there were 45 opportunities for something to go wrong.

“Risk is everything. You can have the best transaction in the world on paper, but if you mess up the execution, then you lose out. I think that first and foremost, as a company, we are a risk manager,” he said.

Noble has a risk management department in Hong Kong with 30 people, but there are also risk managers embedded in the company’s frontline operations.

It was partly Noble’s performance during the past 12 months of financial crisis that has led to it recently being raised to investment grade by rating agencies Moody’s Investors Service and Standard & Poor’s. It is one of the few firms to be upgraded this year.

“This has completely changed the standing of the company in the market,” said Elman. “Major companies that gave us limited credit before give us substantially more now that we are investment grade.”

Noble has significantly strengthened its finances in recent months, raising US$850 million with a 10-year bond issue and securing a committed US$ 2.5 billion revolving credit facility. In addition, it secured US$ 850 million from one of the world’s biggest sovereign wealth funds, China Investment Corp, for a 15 per cent equity stake.

“This was a very significant deal for us, and I think they are going to add a considerable amount of value to Noble in future,” said Elman.

He said there was the prospect of jointly investing in agricultural projects.

The stock is trading just off its record high of S$3.08 (HK$17.20) at S$3.07, an increase of 201per cent so far this year.

With the world’s population growing at 3 per cent, Elman reckons it will need at least 3 per cent more food. The company is on course to double in size every five years, a target he is determined to achieve. “It’s my vision, it’s my aim, and I don’t like to fail,” he said.

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Berkshire Hathaway B shares proposed split

Warrent Buffett does the splits for Berkshire Hathaway

Berkshire Hathaway Inc.'s planned 50- for-1 stock split will put its Class B shares within reach of investors Warren Buffett once called an ``inferior'' class.

The proposed split, announced today as part of Berkshire's takeover of Burlington Northern Santa Fe Corp., would push the price of each Class B share to $US66.51 from $US3,325.35, data compiled by Bloomberg show. Buffett created the equities in 1996 by dividing Class A shares by 30 to prevent fund managers from carving them up in trusts and selling lower-priced interests. The B shares have never traded below $US990.

I'm buying! A stock split effectively brings the share price down to a very affordable level and I am quite confident that the B shares will become a hot speculator favourite which means more violatility but also means the $66.51 post-split share price might become $100 or $200. That is assuming that Berkshire do not control the price.

From my knowledge, Berkshire B shares (which represents 1/30 of an A share) have never traded significantly above 1/30 of an A share as Berkshire does buy in more A shares and sell more B share to bring the price back to equilibrium. However, I have a feeling that might changed.

It's a wild speculative bet and I'm loving it! :) Even if it does not pan out the way I think, Berkshire is not in anyway inferior to any good business at the current price.

Portfolio Update October 2009

2009 Year to date (YTD) Return Portfolio 16.66% Equity(Include Funds)  76.16% Direct Shareholding 160.25% Dividend/Coupon/Interest received for 2009 $87,599 Cumulative Return Since Nov 2007 Portfolio 2.30% Equity(Include Funds) 10.33% Direct shareholding 15.76%

1) Big fluctuations in market value for this month but ended up more or less at where I left off in September. Barring any unforeseen events, I am optimistic going forward and will use the dips to buy any stocks that are undervalued.