Whitehaven Coal: All eyes on record spot prices
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 13 August 2021, 11:00 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
- We again upgrade for higher-than-expected NEWC coal prices.
- Our valuation revises to (login to view)on FY22 assumptions which still look modest against record spot prices. Our valuation under a bullish pricing scenario comparable to the 2017-18 period is (login to view).
- Seaborne thermal coal markets look strong into end-CY21 on a confluence of factors including a Chinese domestic supply crisis.
- WHC’s cashflow leverage is compelling (FY22F FCF yield @ 31%) on bull case pricing and looks to finally be getting some market recognition.
Far higher-than-expected export thermal coal prices.
Spot NEWC pricing testing US$170/t, combined with the weaker AUD is generating spot A$ prices of ~A$228/t, which exceeds the previous record set in July 2008 by A$35/t or 13%.
A strong outlook for seaborne thermal coal prices through to CY22 is supported by: 1) current critical supply challenges within China (altered trade flows; 2) solid North Asian demand; 3) low customer inventories; and 4) sluggish NSW supply.
WHC reports August 26. Focus is likely to remain on Narrabri’s recovery and its impact on price realisations. We think that FY22 Narrabri guidance could underwhelm, and have reduced our FY22 ROM assumption to 5.0Mt versus 4.1Mt in FY21 and its long-term average of 6.6Mt.
Forecast and valuation update
Net ~7-52% upgrades to FY21-23 EBITDA driven by higher coal price assumptions, more than offsetting lower production and higher cost assumptions.
DCF based valuation revises to $2.65ps (from $2.30) and excludes any value for Vickery or Winchester. Our valuation under a pricing scenario comparable to the 2017-18 period is $3.71ps.
We forecast net debt to reduce by $425m in FY22 to ~$350m (~9% gearing, ~0.4x leverage) suggesting solid upside to our modest dividend forecasts (2.6% yield).
Under the bullish pricing scenario detailed on page 4, we forecast WHC to achieve net cash in early FY23, supporting more material dividends.
We do see clear upside to shareholder returns in this environment, but equally we think WHC will carry less net debt into the next cycle (change in funding markets) affording it better M&A flexibility.
We think it is highly plausible that BHP will consider divesting its BMA assets (as it is for BMC), and we note WHC sits among a small cohort of capable domestic operators for those assets.
WHC offers ~13% upside potential to our base case valuation, +55% upside potential to our bull case valuation and we retain an Add rating, with upside linked to persistently higher coal prices above our revised assumptions.
Narrabri’s recovery does take the cream off short-term earnings, but WHC’s cashflow leverage to price is impossible to ignore (base case FY22F FCF yield ~23%).
Recognition of WHC’s valuation disconnect by momentum investors the longer coal prices stay near record levels.
Narrabri’s tough FY21 risks WHC’s value being discounted until its production and costs are stabilised/ re-based.
Production disruption from a single key asset, commodity price and FX volatility.
ESG trends driving a discount to fair value.
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