Whitehaven Coal Limited

Company Overview: Whitehaven Coal Limited (ASX: WHC) is mainly involved in exporting high-quality thermal and metallurgical coal from Australia to the rest of the world. WHC is a dominant player in Australia’s only emerging high-quality coal basin. The company operates four mines (three open-cut and one large underground mine) in the Gunnedah Coal Basin of New South Wales (NSW). WHC operates two high-quality, near-term development assets - Vickery, near Gunnedah, and Winchester South, in Queensland’s Bowen Basin. For producing high-quality coal, the company uses open-cut mining methods at Maules Creek, Tarrawonga, and Werris Creek, and underground mining methods at Narrabri.

WHC Details

Growth Backed by High-Quality Development Assets: Whitehaven Coal Limited (ASX: WHC) is a leading Australian producer of premium quality coal with two high-quality, near-term development assets - Vickery, near Gunnedah, and Winchester South, in Queensland’s Bowen Basin.  As on 13 January 2021, the company’s market capitalisation stood at ~$1.65 billion. WHC’s development projects help it to further diversify its product mix, with a greater weighting towards metallurgical coal with low impurities. The company’s assets have good access to transport and port infrastructure, which enables it to supply the major markets of the Asia Pacificregion reliably.

Over the period of 2016-2020, the company’s revenue witnessed a CAGR of 10.27%.

Currently, the company is focused on increasing its market share in Asia, which is the centre of global economic growth and relatedly, coal demand. Further, the company is focused on maintaining its prudent debt levels, returning surplus cash to shareholders, and growing its business. The company expects to see a fundamental shift and a broad-based coal price recovery across both thermal and metallurgical markets.

FY20 Result Highlights: For FY20, the company reported revenue of $1,721.6 million and an underlying EBITDA of $306 million. Equity ROM coal production for FY20 stood at 6.5Mt, down by 4% on the previous year, reflecting the eight-week Narrabri longwall change out, the challenging production conditions at Maules Creek due to labour shortages and disruption on the back of drought and bushfires, and the impact of unmapped historical underground workings at Werris Creek. The company’s sales into the growth markets of South East Asia accounted for 11% of total sales for the year. Despite facing drought, bushfires, and COVID-19 pandemic during FY20, WHC achieved its revised production and sales guidance, with managed coal production of 20.6 million tonnes and managed coal sales, excluding purchased coal, of 17.5 million tonnes. In FY20, the company paid an unfranked dividend of 1.5 cents per share as an interim dividend, which is 50% of full-year NPAT. The company has declared no final dividend for FY20. As of 30 June 2020, the company had a healthy level of liquidity of around ~$470 million, supported by the refinancing of its $1bn senior debt facility.

ROM Production and Sales (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 40.87% of the shareholding. Lazard Asset Management Pacific Company and Prudential Assurance Co., Ltd. hold the maximum interest in the company at 10.92% and 5.38%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For FY20, the company reported gross margin and EBITDA margin of 39.7% and 46.5%, respectively. The current ratio for FY20 stood at 1.39x, higher than the industry median of 1.07x, demonstrating that the company is well equipped to pay its short-term obligations. The debt-to-equity multiple for FY20 stood at 0.32x, lower than the industry median of 0.40x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Q1FY21 Result Highlights: During the September 2020 quarter, the company delivered on-plan mining performance of coal across all operations, laying a solid foundation to much improved operational results. For the quarter, the company reported total managed coal sales of 6.0Mt, up 13% on pcp. Further, the company reported managed own coal sales of 5.6Mt, up 15% on pcp. Over the quarter, WHC realised an average price of US$52/t for sales of own thermal coal, in-line with the gC Newc (the globalCoal Newcastle Index) average price for the September quarter. Managed run-of-mine (ROM) production stood at 4.5Mt, up 4% on pcp. During the quarter, the company progressed its development projects and implemented various business improvement measures to drive cost reductions.

WHC Managed Totals – Continuing Operations (Source: Company Reports)

Rise in Total Coal Reserves and Resources: On 16 December 2020, WHC released its maiden Reserves Statement for the Winchester South Project metallurgical coal mine, wherein, it reported that Project JORC Resource is upgraded to 1,100Mt from 530Mt, increasing the total Coal Resources by 12% since August 2020. Moreover, the company notified regarding a maiden JORC Reserves of 350Mt that has increased the Total Whitehaven Coal Limited Coal Reserves by 26% since August 2020.

Key Risk: The company’s financial performance may get impacted by general economic activities, changes in industrial production levels, changes in foreign exchange rates, and changes in coal demand. The company is exposed to the risk associated with the changes in seaborne coal supply, changes in international freight rates and the cost of substitutes for coal. Further, the company is also exposed to operational risk, geology risk, and infrastructure risk.

Outlook: Looking ahead, the company is focused on improving operational discipline and maintaining a strong balance sheet to ensure that it is well-positioned to maximise earnings when coal markets begin to rebalance and recover. The company continues to witness a growing demand for its quality specific coals within the steel making, industrial and electricity-generating sectors. With decent fundamentals driving Asia’s demand for high-quality coal products, WHC is well-positioned to make the most of emerging opportunities in the region. Considering the growing demand for high-quality coal products in Asia, both thermal coal and semi-soft coking coal seaborne prices are expected to increase.

In FY21, the company is focused on obtaining Federal approvals for the Vickery Expansion project and exploring the potential sell down and formation of a joint venture on the Vickery project. The company is on track to meet its FY21 managed coal sales guidance of 18.5 – 20.0Mt. From its Maules Creek operations, the company expects FY21 ROM production to be in the range of 11.3-12.0Mt, reflecting increased utilization of the mining fleet reflecting improvements in staffing and productivity levels. From Narrabri operations, the company expects FY21 ROM production of 6.0-6.7Mt. The company expects to release an update on Q2FY21 production volumes on 14 January 2021.

FY21 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Cashflow Multiple Based Relative Valuation (Illustrative)

Price to Cashflow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of WHC has provided a return of 76.31% in the past three months and is trading lower than the average 52-weeks’ price level band of $0.830 - $2.680. On the technical analysis front, the stock has a support level of ~$1.221 and resistance of ~$2.228. We have valued the stock using the price to cash flow multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). For the purpose, we have taken peers like Yancoal Australia Ltd (ASX: YAL), Stanmore Coal Ltd (ASX: SMR), Coronado Global Resources Inc (ASX: CRN), etc. Considering the company’s high-quality development assets, decent Q1Y21 performance, outlook, robust demand drivers, current trading levels and valuation, we give a “Buy” recommendation on the stock at the closing price of $1.75, up by 9.374% on 13 January 2021.

WHC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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