Whitehaven Coal: Focus on February 16 capital management
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 23 January 2023, 7:30 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
- Whitehaven Coal's (ASXWHC) 2Q sales beat our forecasts by 3%, supporting unchanged FY23 guidance.
- We substantially lift our FY24-25 NEWC forecasts on a persistently tight energy market outlook.
- Our upgraded (login to view) target now includes a 5% discount for 2023 regulatory/ royalty risks.
- Still trading on an average FCF yield of +30% through FY23-24 WHC remains a compelling option over tight energy markets.
2Q production; price upgrades, NSW Coal Reservation scheme/ royalty risks.
Encouraging 2Q: Narrabri (+600kt vs MorgansE) was a strong offset to another wet quarter (306mm rain, 17 days lost O/C access) seeing WHC slightly beat our 2Q forecasts. Assuming “normal” 3Q weather suggests the worst of recent rain impacts is behind WHC, supporting unchanged FY23 guidance.
1H EBITDA in line: Unaudited 1H EBITDA (~$2.6bn) was 3.6% below our forecast on a 2Q mix/realisation below our forecasts (rain/high CV volume impacts at the open cuts) requiring higher purchases. This effect doesn’t concern us, is transient, and ultimately lower NSW volumes are strongly reflected in NEWC’s premium.
NSW Coal Reservation scheme: WHC is not set up for NSW domestic sales. While detail is pending, we see limited scope for WHC volume to be affected due to impracticalities in re-engineering WHC product quality and logistics to supply Hunter Valley generators. The bigger implication is the ongoing risk of deeper regulatory intervention into the export industry as a whole.
Coal royalty risk: Regardless of the outcome of the March 23 NSW State election, we think investors should account for the risk (likelihood in our view) that NSW coal royalties are lifted in 2023. A 250bps lift in NSW royalty rates (OC & UG) would reduce our WHC NPV by 5%. Our valuation now incorporates this discount.
Dividend upside: We think WHC is generating ~$260m of free cash per month (Mar-Q including leasing + PAYG) and we forecast end FY23 net cash of ~$2.9m (including a $450m tax payment) pre further buybacks/dividends.
FY23 dividends have clear scope to surprise depending on WHC’s balancing of the buyback (likely preferred by offshore investors) with dividends (preferred domestically) and M&A.
M&A: Divestments and acquisitions should again feature across the sector in 2023. Could WHC bid aggressively for an asset like BHP’s Daunia? (sale process reported to begin Mar-Q in the financial press). At this stage we think this is unlikely, but do see sense in WHC retaining material surplus cash for M&A optionality.
Forecast and valuation update
NEWC pricing looks to be defying corrections in global gas suggesting downside volatility is possible (customer inventory, shoulder demand). However, beneath that is incredible structural tightness with the re-arranging of Russian exports and Australian intervention only likely to support NEWC premiums for longer.
We substantially lift our FY23-25 NEWC deck by 9-42%. Our DCF based valuation revises to (login to view) inclusive of a higher WACC and higher costs.
Scenarios shown on p5 illustrate that the duration for which current prices persist drives significant (rolling) NPV/cashflow upside.
We see strong potential for prolonged energy market tightness where NEWC supply security into Asia commands higher premiums for longer. At a +30% FCF yield, WHC offers upside risk to earnings/ valuation/ capital management.
- 1H23 result 16 February – Capital management upside.
- NEWC price volatility/ seasonality (northern winter not yet concluded).
- Excess sales disruption/ cost inflation.
- Regulatory intervention on operations, tax and/or royalties, real or perceived.
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