Whitehaven Coal: Price offsets transient pressures

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
21 January 2022, 12:30 PM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • We think today’s price weakness includes an over-reaction to downgraded FY22 physicals and cost guidance.
  • Our base case valuation remains at (login to view), as FY22-23 pricing upgrades offset reduced guidance.
  • Physical market feedback suggests ongoing coal price strength above consensus forecasts into 2022. Our valuation in a bullish pricing scenario is (login to view).
  • Our target price of (login to view) includes a premium to reflect upside coal price risk.

2Q production, FY22 guidance downgrades

Lowered FY22 sales guidance ($17.2-17.8m) was ~2% below our prior forecasts. The ~10% or A$7.50/t step-up in guided costs likely drove today’s weakness, and was 10% above our forecasts.


We actually upgrade FY22-23 EBITDA by 6-26% as far higher coal prices forecast absorb these impacts (+10-15%). These have also combined with WHC guidance for dramatically improved 2H realisations (2H: net positive vs GC NEWC, 1H average -16%) as Narrabri returns to cutting fresh coal.

Higher cost guidance is concerning but does include forces that should prove transient including COVID absenteeism (A$1-2/t), wet weather impacts (A$2/t) and subsequent demurrage (A$2/t). WHC also conservatively assumes COVID impacts persist for the entire 2H, far longer than NSW medical guidance.

NEWC thermal coal has bounced back over US$200/t which is US$67/t or 45% above the December consensus for the Mar-Q. We assume NEWC at US$175 for the quarter, implying material upside to our own and consensus expectations.

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 2022. These include:

  1. Resurgent post-pandemic industrial demand;
  2. Highly constrained seaborne supply; and
  3. Very tight LNG markets.

Forecast and valuation update

Base-case DCF based valuation remains at (login to view). We continue to exclude any value for Vickery or Winchester. Beyond FY22 we have conservatively lifted cost assumptions to reflect broader inflationary pressures which WHC does see (diesel, tight labour).

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.

Our base case forecasts a net cash position of $240m by end FY22 excluding any dividends. Management is coy, but we do expect a modest 10cps dividend at the 1H result on February 17 to reflect the strong outlook. We expect higher dividends in the 2H and a bullish price scenario clearly offers dividend upside potential.

Investment view

WHC offers 19%/56% upside to our base/bull case pricing scenarios respectively. We demonstrate clear upside linked to sustained coal prices above expectations.

WHC is accumulating roughly 27cps in free cash per quarter on our conservative price assumptions.

The market has a history of over-reacting to short-term disappointment and we think today’s weakness presents a buying opportunity as these issues pass.

Price catalyst

Directional, NEWC coal price moves, but also recognition of rapid cash accumulation the longer high prises persist.


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

Production disruption, 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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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