Whitehaven Coal: Supercharged returns

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

26 August 2022, 7:00 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• Whitehaven Coal's (ASX:WHC) key FY22 financials were in line, but the dividend, as well as FY23 production/cost/capex guidance, were all slightly worse than expected.
• Much stronger than expected NEWC thermal prices overwhelmed these impacts, driving material EPS/valuation upgrades.
• Our upgraded (login to view) price target is now set at a blend of our base/bull case valuations to reflect ongoing upside to our coal price deck.
• We think WHC can continue to re-rate as an option over an extended energy market dislocation sustaining windfall earnings and dividends.

FY22 result snapshot

WHC’s FY22 revenue and EBITDA were within 2% of our expectations and close to consensus. Free cash generation of a staggering $2.4bn (32% FCF yield) was also in line, but an accrued $550m FY22 tax bill is due in December.

The 40cps final dividend (franked) disappointed (Morgans 47cps, Consensus 54cps) linked to WHC’s views on cap management/equity value per below.

Analysis

Softer guidance: All of guided FY23 managed sales (17.5-18.5Mt, 6% below), coal production costs (A$89-96/t, 6% above) and total capex ($287-360m, $200m above) were incrementally worse than expected.

Production continuity in terms of labour availability remains a key challenge, with another La Nina forecast posing a threat to FY23 physicals.

Growth pushed back = staggering cash accumulation: WHC held $1.04bn in net cash at June 30. At current prices/guidance, it is notionally generating $350m of monthly operating cash flow (post-tax).

FID on either Vickery/Winchester is also now not expected for up to another 2 years, seeing WHC accumulate significant cash in the interim (FY23F net cash $2.2bn/$2.30ps pre dividends).

Capital management views: Inclusive of $1.1bn in flagged 2H payments (FY22 tax, buyback completion, final dividend), WHC will likely hold over $1.2bn (~$1.30ps, post accrued tax) by the late October AGM.

WHC’s capital management framework remains intact, where a FY23 step-up in capex is consistent with optimising of the production base (Narrabri extensions), while preparing Vickery and Winchester for FID.

One of the strongest takeaways today was management’s view that share buybacks (at current pricing) far outrank internal growth options in terms of value accretion.

WHC flagged completion of, and extension to, the current buyback (at the AGM) and a notional 20% dividend payout ratio until better value is reflected in the WHC price.

Price environment: Ultimately WHC is a compelling (volume) leveraged play on far stronger than expected seaborne thermal coal prices. On page 6, we explain why we see solid upside risks to our base case pricing scenario.

Forecast and valuation update

We adjust for FY23 actuals, model roll-forward and FY23 guidance.

These effects are offset by a 12-28% lift in our FY23-24 price assumptions and a lift in our long-term NEWC price assumption to US$85/t (from US$80/t) to reflect rising industry cost structures and the dynamics discussed on page 6.

Base-case valuation adjusts to (login to view). We now set our (login to view) target at roughly a 55:45 blend of our base: bull case price scenario valuations.

Investment view

We see strong potential for a more prolonged dislocation in energy markets where supply security commands a higher premium for longer. WHC offers ~2%/24% upside to our base/bull case pricing scenarios (excluding growth assets) with clear upside risks to valuation and dividends.

Note that thermal coal futures pricing currently sits well above our “super-bull” price scenario, which supports an NPV towards $11.00ps.

Price catalysts

Persistent coal price strength into the Northern hemisphere winter.

Risks

Energy market recession, NSW Royalty hike, unchecked cost inflation.

Find out more

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