Novo Group 3Q Results

Novo Group's 3rd Quarter results were released on the 15th of March.

Income Statement

Sales for 9M09 were down 18%, and cost of sales were down 23%. However, for the 3Q09, sales were up 67.7%, with an increase in cost of sales to 60.3% as compared 3Q08.

The reduction in the cost of sales contributed to a 186% increase in Operating Profit. This was also affected largely affected by change in other operating expenses. Other Operating Expenses
experience a 96% drop for year to date, due to a large decrease in foreign exchange losses.

Finance costs for the year to date decreased by 66%, total of 0.24% of sales. Net Profit for the year to date increased by 816%, and a profit margin of 3%. Estimated P/E for the year, assuming equal earnings through 4 quarters, was 7.3x.

As Novo is currently a supply chain manager and does not have an upstream mining facility, the profit margin of 3% is respectable. As it is actively growing, I would look to have profit margins between 3% to 5%.

Balance Sheet

Novo has a slightly weaker balance sheet as compared to the FY2009 due to its expansion activities.

• Current Ratio has dropped from 2.98 to 2.26
• Net cash per share of -0.04 as compared to a positive net cash position
• Asset per share has increased by 2 basis points to 0.12.
• Debt/Equity is 0.74, compared to 0.49 in 2009
  
• ROE is at 18%, compared to 4% in FY2009
• P/B has dropped from 1.55 to 0.20

As Novo expands, there is a need to observe the Debt/Equity Ratio. Noble Group has a debt/equity ratio that ranges from 2.5 to 3.5. I would look for Novo to increase their financial leverage over the next few financial reports.

The assumed increase in debt should be used for capital expenditures to expand Novo's business. If there is a large decrease in cash used for capital expenditures, there would be a flag for me. Likewise, if the gross PPE does not increase, another flag would be raised.

Overall, the balance sheet reflects that the company is in the growing stage and is starting to pursue expansion plans.

Cash Flow

Capital Expenditures was 1,357k YTD2008 up from 27k YTD2009. Free cash flow was negative.

Opportunities for the Future

China has a huge demand for raw materials as it grows, among which there is high requirement for steel due to the need for it to build infrastructure to support its growth. In 2009, the iron ore imports increased by 42% to 628million metric tonnes. Novo has secured fixed quantities of raw materials to be supplied from mining companies.

Novo has also intended to commence its scrap metal business in 2011. The capital spent to set up the business will be estimated at USD24million.