Whitehaven Coal: All eyes on record spot prices

About the author:

Tom Sartor
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.

Event

Far higher-than-expected export thermal coal prices.

Analysis

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.

Investment view

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%).

Price catalysts

Recognition of WHC’s valuation disconnect by momentum investors the longer coal prices stay near record levels.

Risks

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.

Find out more

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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