Noble group prices CB

Commodities trading group completes its most ambitious deal to date.

One of Asia's rising mid-caps stars made its debut in the convertible market yesterday (Monday) raising $200 million under the lead management of JPMorgan. The Hong Kong based, Singapore-listed group has been one of the best performing stocks in the region over the past 12 months and as it has grown, management have worked hard to broaden investor access.

A convertible marks a next logical step for the company following two placements in 2003 - a $24 million offering in February and a $75 million offering in October. A one-for-four share split was also announced last month with the aim of attracting greater retail interest in the company's equity.

Though Noble's market cap now stands at $1.27 billion, a placement of up to $200 million in size would have had an extremely heavy impact on the group's freefloat and put a lot of pressure on its share price. Pre-deal, Noble had a freefloat of 38.1%.

Its share price has risen more than 360% over the past year from about S$1.30 to a close yesterday of S$4.36. The convertible was structured to cap further acceleration in share price performance and has an unusual three-month call feature. Final terms comprise a five-year maturity with a par in, par out structure and two-year put.

The deal was marketed with a coupon of 0.75% to 1% and a conversion premium of 33% to 38%. It was priced towards the lower end of the range at 0.90% and 34.5%.

The three month call feature also has a lower than normal hurdle of 117.5%. Investors normally hate short-dated call options because they do not give them time to ride the equity story.

However, in this instance, observers say books were covered within 10 minutes of launch. A total of 45 accounts participated, a relatively small number for a mid-sized CB offering.

Underlying assumptions comprise a bond floor of 94.75%, implied volatility of 36% and theoretical value of 101%. This is based on a credit spread of 175bp, zero stock borrow and 40% volatility assumption. The dividend was modelled at 0.8%, but the exact protection is above a pay-out ratio of 27.5%.

Given the stock's lack of a credit history and the unavailability of stock borrow, accounts are said to have viewed the CB as a straightforward equity play. Not many of the big houses currently cover Noble group, but the regional brokerages which have tracked its spectacular rise still have buy recommendations on the stock.

Since it first started to come to the forefront of investor attention in 2002, Noble's stock price has rarely wavered from its upward trajectory. It is presently trading at about 3.4 times price to 2004 book (CLSA estimates).

Founded by former commodities trader, Richard Elman, in 1987, Noble derives most of its revenues from supplying raw materials. In many ways it is a direct play on GDP growth in China, India and Indonesia and has benefited enormously from China's insatiable demand for commodities.

The Mainland accounted for about 40% of the group's $4.1 billion revenues in 2003. In 2002, the group saw turnover increase 61% and in 2003 by 49%.

One of the main drivers last year was shipping, which saw turnover rise 150% to $270 million. Raw materials supplies accounted for the remaining $4.1 billion. ROE stands at 24% on an annualised basis.

In a recent interview with FinanceAsia (see related articles), CFO Steve Marzo said the group is moving away from its traditional asset light business model. In particular, it is looking to invest in strategically important businesses in the commodities supply chain. In the third quarter of 2003, for example, it increased its stake in Australia's Donaldson Coal from 6% to 50%.

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