Whitehaven Coal: Dividend expectations climb

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
20 October 2021, 7:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • 1Q production was broadly in-line with our expectations.
  • Physical market feedback continues to suggest that upside risk to our base-case coal price forecasts will persist into 2022.
  • Our base case valuation adjusts to $3.32ps, and our valuation under a bullish pricing scenario comparable in duration to the 2017-18 period is $4.51ps.
  • Our revised target price of (login to view) is now set at the mid-point between our base and bullish case valuations, to recognise ongoing upside risks in physical markets.

1Q production

1Q production (4.7Mt saleable, 4.6Mt sales) was broadly as expected, while price realisations (-15.5% down from -13.8% q-o-q) slightly disappointed.

Narrabri volumes were far improved post equipment overhaul, and WHC expects realisations to “normalise” (we still assume a slight discount) in the 2H after the 2Q move to LW110. FY22 guidance was unchanged.

Analysis

Physical markets: NEWC physical trades have followed the paper market into the US$230/t range on unprecedented market tightness. These numbers eclipse the bullish scenario outlined in our last update only two weeks ago. 

How long can record prices last? Market participants admit it is difficult to form a medium-term view on price but a perfect storm of drivers looks likely to persist well into 2020. These include: 1) resurgent post-pandemic demand; 2) critical Chinese domestic shortages; 3) highly constrained seaborne supply; and 4) extremely tight LNG markets/ pricing. Key suppliers including Indonesia and South Africa appear to have little capacity to lift supply, and the same applies to Australia where we also see some supply discipline.

Forecast and valuation update

Net ~6-16% upgrades to FY22-23 EBITDA driven primarily by higher coal price assumptions.

Base-case DCF based valuation revises to $3.32ps (from $3.23). At such elevated margins (FY22F A$99/t, 50%), WHC’s valuation is very sensitive to the duration for which record prices persist. On page 4 we show valuation/ cashflow sensitivities to a bullish price scenario comparable in duration to the 2017-18 period.

Given upside risks to coal pricing, we set our (login to view) target at the mid-point between our base and bullish case NPV scenarios. We continue to exclude any value for Vickery or Winchester.

Our base case forecasts net debt to reduce by $920m in FY22 to a +A$100m net cash position, inclusive of modest dividends (6.1% yield). A bullish price scenario clearly offers significant dividend upside in our view.

Investment view

We demonstrate clear upside in WHC linked to sustained coal prices above expectations. WHC still intends to bank 12-18 months of cashflow before re-considering greenfields growth.

The company is rapidly on the way to net cash (3Q or earlier) and is accumulating ~27cps of cash per quarter at current prices (FY22F FCF yield of ~33). We see significant upside potential to our current dividend forecasts.

Price catalysts

Market recognition of WHC’s valuation disconnect is now taking shape the longer coal prices stay near record levels.

Potential medium-term recognition of strategic value in WHC’s growth projects.

Risks

Narrabri’s operating risks will remain elevated in LW110 in our view.

Production disruption from a key asset(s), infrastructure availability, commodity price and FX volatility.

ESG investing trends potentially driving a permanent discount to fair value.

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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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