By Chris Shaw
Whitehaven Coal (WHC) didn't surprise with the June quarter production report, with saleable coal for the period of 1.006 million tonnes. Annual sales of 4.1 million tonnes were also in line with broker estimates, though RBS Australia notes the company did sell 200,000 tonnes less of its own coal and 200,000 tonnes more of others' as it continues to blend output.
The highlight of the quarterly update in RBS's view was progress at the Narrabri operation, as Stage I was completed in line with the revised budget of $277 million and the company continues to successfully mitigate project risks.
Much of the progress at Narrabri in the period was in draining in-seam gas to levels below those required for continuous mining. Macquarie agrees this has significantly de-risked the longwall project, thus enhancing Whitehaven's growth profile.
Looking to FY11, Credit Suisse sees scope for production to disappoint, as it notes management has a sales target for the year of more than six million tonnes. Assuming Narrabri can produce 500-700,000 tonnes in FY11 the broker suggests the open cut mines will need to produce at design capacity of 5.5 million tonnes for this target to be met.
On a quarterly basis this implies production of 1.375 million tonnes, which would be an increase of 37.5% from what was achieved in the June quarter. There is scope for such a ramp-up to fall short on a timing basis according to Credit Suisse, so it suggests output next year may fall a little short of the current target.
But this appears to be a shorter-term issue and doesn't detract from the Whitehaven growth story, as Macquarie points out from FY12 earnings growth should be strong as the company will be enjoying both increased production and greater port capacity.
On Macquarie's numbers, by FY12 Whitehaven will have access to at least 9.5 million tonnes per year of port capacity which can be met from expanding production at Narrabri in coming years. Government approval for Narrabri Stage II has been granted and would allow for an expansion to production of eight million tonnes per annum.
Macquarie suggests Whitehaven may not choose to go to this level, seeing annual production of 5-6 million tonnes per annum as a comfortable level for the company.
While production is set to improve in coming years, RBS Australia agrees this won't show up in the company's FY11 accounts, largely due to legacy fixed price contracts for more than 3.5 million tonnes at less than $70 per tonne.
As these contracts roll off and production at Narrabri increases RBS expects strong earnings growth. The broker expects the market will look through FY11 to continue buying the stock in expectation of this growth in later years.
The other factor likely to keep interest in the stock high according to RBS is the potential for corporate activity, as evidenced by the Banpu bid for Centennial Coal ((CEY)) elsewhere in the sector. If a similar premium were applied to Whitehaven as is being offered for Centennial the broker suggests a price above $7.00 per share is not unreasonable.
What the potential for corporate activity in the stock also does in the view of GSJB Were is protect against share price downside, which the broker suggests is possible given the valuation risk associated with much of the company's current value being tied up in a single underground coal mine.
In terms of the earnings growth expected in coming years, RBS Australia is forecasting earnings per share (EPS) for Whitehaven of 10.7c this year, 24.3c in FY11 and 49.6c in FY12, which shows the growth potential from the combination of higher realised prices and increased production.
In comparison Credit Suisse is forecasting EPS of 10.4c this year, 17.8c in FY11 and 34.2c in FY12, while Macquarie expects EPS of 11.2c, 20.7c and 40c respectively and GSJB Were is at 11.5c, 21.9c and 45.2c through FY12. Consensus EPS forecasts according to the FNArena database stand at 11c in FY10 and 25.4c in FY11.
Post the quarterly production result for Whitehaven the FNArena database shows the stock is rated as Buy four times and Hold three times, with an average price target of $5.87. The only change in rating on the back of the quarterly came from Deutsche Bank, which downgraded to a Hold on valuation grounds.
Shares in Whitehaven today are slightly weaker and as at 11.40am the stock was down 5c at $5.39. This compares to a trading range over the past year of $2.88 to $6.05 and implies upside of almost 8% to the average price target in the FNArena database.
