New Hope Corporation: Rewards for patient investors
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 22 March 2023, 7:00 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
- 1H interim dividends were strong, but missed the market’s expectations as New Hope Corporation (ASX:NHC) weighs inorganic growth options against returns, similar to peers.
- We think NHC will apply the most discipline to potential sector M&A versus peers, raising the likelihood of the large surplus capital returns in time.
- NHC’s Bengalla expansion (ongoing) and Acland ramp-up (from late 2023) are material cashflow contributors which look under-recognised by the market.
- The resumption of the equity buyback, and a re-tightening of thermal coal price dynamics are near-term price catalysts. Maintain Add.
FY22 Result snapshot
Key 1H financials are pre-reported (underlying EBITDA $1.04bn, Op cash $983m).
The 40cps interim dividends announced (30cps Ordinary + 10cps Special) were above our forecast (30cps) but are well below VA consensus (54cps) as feared. We’re surprised this didn’t knock the stock around today.
Key takeaways/ new news
Other new news: 1) Re-affirmed FY23 Bengalla production guidance; 2) slightly re-shaped Acland ramp-up guidance (lower, but in-line); and better detail on FY23- 25 capital guidance for both the Bengalla expansion and Acland 3 development, with Acland slightly above our expectation.
We think NHC’s organic growth profile (including the minority interest in Malabar) is under-recognized by the market. Further opposition/ uncertainty around Acland’s timing is possible, but we do think the late 2023 ramp-up is the most likely outcome with the FY24 arrival of material Acland cash flows a major catalyst in our view.
We also think the market under-appreciates Acland’s benefits to NHC’s risk profile (second material revenue source, geographic/ logistics diversification). We value Acland Stage 3 at ~$0.80ps (unrisked).
M&A versus return potential: We think cum-acquisition risk plausibly overhangs NHC, WHC and CRN in the short term as large dividend expectations were likely priced in previously. We think NHC would have plausible interest in Blackwater but would be cautious about value, sustainable margins and the onerous rehab liability (risk).
While NHC has had M&A failures (NEC) it has also had much larger successes (New Saraji, Bengalla). This gives us confidence that NHC won’t over-reach into M&A, and we think the eventual return of surplus capital to shareholders is more likely than a large acquisition.
Forecast and valuation update
We make only minor earnings adjustments. Lower assumed price realisations, the Colton settlement and the application of slightly higher capital to Acland 3 explains the reduction in out DCF based valuation to (login to view).
NHC’s tier 1 Bengalla mine provides long-life, low-cost/ high margin cash leverage to the compelling case for NEWC price upside above current market expectations into the medium term.
NEWC pricing is currently moving through an air pocket but we explain why we think coal pricing dynamics can re-tighten through April. This offers stability and the re-thinking of value/ capital upside in NHC by the market.
NHC’s Bengalla expansion, Acland Stage 3 ramp-up and remaining hard asset base looks under-recognised. NHC’s prior approach to M&A, the DNA of its board and its very high franking balance (~$600m) suggests to us that windfall returns of surplus capital (in time) are on offer for patient/ value investors.
- Resumption of on-market equity buy-back (imminent).
- Stabilisation in thermal coal markets/ pricing (April).
- First Acland Stage 3 production/ sales (late 2023).
- Better clarity on M&A strategy vs returns outlook (late 2023).
- Macro-economic dislocation, production disruption, unchecked cost inflation.
- Government intervention on taxation and/or royalties, real or perceived.
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