New Hope Corporation: All eyes on Dividend upside
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 23 August 2022, 7:00 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
- New Hope Corporation's (ASX:NHC) 4Q Production/Sales were more resilient to disruption than we had feared.
- Coal prices continue to surprise, driving further EPS/ valuation upgrades.
- Base-case valuation/target adjusts to (login to view), Bull case: (login to view).
- We think NHC can re-rate as the market awakens to the sheer scope of current cash flows and ongoing dividend upside potential. ADD.
Resilient 4Q Production drives earnings above forecast
Weather and COVID/absenteeism drove an 18% loss of available 4Q truck hours (we guesstimate double the normal), however 4Q sales of 1.85Mt were 5% ahead of our forecast. Astute management, higher domestic demand/ sales and possibly some traded coal helped to offset 4Q disruption.
Sales above our forecast, the lower 4Q AUD and higher JFY settlement explain how 4Q EBITDA $645m (unaudited) beat our forecast by 6% (FY22: $1.56bn beat by 2%). Year end cash of $815m was in-line with our forecast ($800m), adjusted for the $94m Malabar investment.
FY23 outlook: NHC intends to lift Bengalla ROM production to 13.6Mt (including a higher washed component) by 2024. At this stage it guides to increased FY23 production (FY22: 11.7Mt) but we expect more detail at the FY22 result on September 20.
Compelling cash generation: We forecast 1Q23 EBITDA above A$875m. Assuming modest capex, we think NHC’s current monthly net cash accumulation (pre-divs) sits at ~$180m (~22cps).
Our forecast FY23 cash build sits below this rate as we forecast prices to decline, but our scenarios on page 5 illustrate that the duration for which current prices persist drives significant cashflow/dividend upside to a scale we think the market is dramatically under-estimating.
Dividend motivations: We expect NHC to hold modest net cash through the cycle for prudence (say $100-200m). We also think NHC’s controlling shareholder is strongly motivated to draw higher dividends from NHC, for the significant optionality in re-investing that capital into non-coal assets/ sectors where values have corrected.
Sep-20, Dividend potential: We estimate NHC held ~$627m in net cash at July-31. If it targeted ~$300m of net cash post the FY22 div payment in early Nov, then it could plausibly pay a FY22 final of +$850m, equivalent to over $1.00ps.
The actual will of course depend on several factors (capital requirements/ outlook), but clearly there is significant upside risk to consensus/Morgans FY22 dividend expectations of 47cps/ 60cps.
Forecast and valuation update
Large upward revisions are driven by; 12-28% upgrades to our FY23-24 NEWC forecasts; application of the US$375/t JFY price (well above expectations); and net of slight adverse adjustments to assumed FY23 sales and FOB costs.
Our DCF based valuation revises to (login to view) and includes value for Bridgeport (unrisked) but no value for Acland 3.
Our valuation under a Bullish pricing scenario is (login to view). For now we treat the Con Notes as debt but we’d expect full conversion ($200m @ $2.10ps up to Jul-26).
NHC offers +11% upside to our base case NPV, but with clear leverage to higher coal prices (Bull case ~30% upside) and with significant dividend upside versus our forecasts.
We think NHC can re-rate in recognition of this potential.
- NEWC moves, achieved production, Acland 3 progress, potential M&A.
- Production disruption, FX volatility, NSW Royalty hike, unchecked cost inflation.
- A breakdown in elevated energy prices is the key share price risk. On page 5 we explain why we think the FY23 outlook for thermal coal pricing is better than the market currently fears/ implies.
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