Whitehaven Coal: A strong sign of returns to come

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
18 February 2022, 8:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • 1H22 cemented Whitehaven Coal's (ASX:WHC) turnaround, although EBITDA/cashflow were slightly below our forecasts.
  • Current coal prices versus forecasts support strong upside risks to WHC’s 2H dividend (FY22F FCF yield ~35%).
  • Our base case valuation ticks up to $3.38ps, while our target of $3.72ps includes a premium to reflect upside risk linked to further coal price strength.
  • Physical market feedback suggests ongoing coal price strength well above consensus forecasts. Our valuation in a bullish pricing scenario is $4.34ps.

1H22 Result snapshot

A near $600m uplift in EBITDA vs the pcp to $632m cements WHC’s stunning price-driven turnaround. However this missed Visible Alpha consensus by 7% and our forecasts by 10% as we underestimated higher costs of coal purchases in particular. FY22 guidance remains unchanged.

The 8cps (unfranked) dividend was below our 10cps estimate and consensus, representing a 24% payout (cap mgmt. policy 25-50%). The additional $400m on-market buyback (up to 10% of register, 12 months) was the key surprise today.

Analysis

Our take on capital management: Today’s mixed response likely reflects disappointment from short-term investors in the 1H div versus WHC’s ability to pay more. We wouldn’t be surprised to see deployment of the Buyback skewed toward episodes where WHC can sell-off to up to ~35% discounts to NPV. We see the buyback as a tool to smooth volatility, support EPS/value accretion, to endorse the strong outlook and to help build a better quality register in time. Also, generation of 2H franking credits can only improve the likelihood of higher payouts.

Clear dividend upside: WHC re-confirmed it has no appetite to sanction major growth capex (Vickery) in the coming 12 months and likely longer. We note production discipline has been a feature among major producers and a material contributor to pricing. Our base case forecasts see WHC generating $100m (10cps) in free cash per month, while spot prices support generation closer to $150m p.m (15cps). The 25-50% NPAT payout policy suggests a 2H dividend of 14-27cps is plausible, depending on the prevailing outlook and how much of the buyback is actually deployed.

WHC again made clear its intention to essentially maintain a net cash balance sheet through the cycle which should assist in attracting longer term investors.

Comments that WHC is seeing COVID absenteeism starting to abate are encouraging in the context of conservative cost guidance issued in January.

Forecast and valuation update

Base-case DCF valuation adjusts to $3.38ps (from $3.32) excluding any value for Vickery or Winchester. WHC’s valuation is very sensitive to the duration for which record prices persist (login to view). Our bull case valuation is $4.34ps.

NEWC thermal coal has again surged to over US$250/t, averaging over US$220 so far in the Mar-Q versus our revised forecast of US$185 and consensus closer to US$160. Our $3.72ps target applies a premium to reflect upside to conservative forecasts.

Investment view

WHC offers ~13%/45% upside to our base/bull case pricing scenarios (excluding growth assets) and we demonstrate clear upside risk to both shareholder returns/valuations linked to coal prices trading above conservative expectations.

Price catalysts

Directional NEWC coal price moves; Positioning for / recognition of rapid cash accumulation and dividend upside in time.

Risks

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

Production disruption, cost inflation, commodity price and FX volatility.

ESG trends potentially driving a persistent 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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