New Hope: Higher Thermal Coal Price Forecasts

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Following an increase in thermal coal price forecasts, Macquarie lifts its valuation for New Hope Corp, along with other exposed stocks under coverage.

-Macquarie lifts forecast thermal coal prices, boosting earnings estimates for New Hope Corp
-Price forecasts rise on market deficit and energy supply concerns
-The broker raises valuations for coal producers across the board
-Most brokers covering New Hope have a positive view

By Mark Woodruff

Shares of thermal coal miner New Hope Corp ((NHC)) may be set for further upside, despite a consistent march upwards to around $6.00 from $2.30 at the start of 2022.

This comes as Macquarie’s commodity strategy team raises its short and long-term price outlook for thermal coal due to a market deficit and the willingness of developed economies to pay a premium to secure energy supply.

The company produces thermal coal from its 100%-owned New Acland open-cut mine in Southeast Queensland and its 80%-owned Bengalla open cut mine in the Hunter Valley, NSW. New Hope primarily exports its coal and owns the QBH export terminal in the Port of Brisbane.

Over 2023-27 Macquarie’s thermal coal price estimates rise by 38-114%, while the long-term price forecast rises by 43% to US$80/t from US$58/t. 

The broker’s FY23 and FY24 EPS forecasts for Overweight-rated New Hope rise by 34% and 163%, respectively, and by over 400% from FY25, albeit from a low base. As a result, Macquarie’s 12-month target price for New Hope increases to $7.00 from $6.00.

The coal price upgrades also have a material impact on forecast earnings for other producers with thermal coal exposure within Macquarie’s research coverage.

The impact on Coronado Global Resources ((CRN)) is more modest as more than 90% of its revenue derives from metallurgical (met) coal, and the analyst only raises the target to $3.60 from $3.50. The company retains its mantle as the broker’s preferred met coal exposure and is Outperform rated.

Macquarie's EPS forecasts for Whitehaven Coal ((WHC)) rise by 28% in FY23 and by 100%-200% for FY24-27 and its target jumps to $12 from $10. BHP Group’s ((BHP)) EPS forecasts are increased by 4-6% for FY23 to FY26 and the broker’s target rises to $44 from $42. An Outperform rating is retained for both companies.

While New Hope (like Whitehaven Coal) is highly leveraged to thermal coal prices, Macquarie notes accelerating ESG momentum will potentially introduce downside risk to valuation via a higher cost of borrowing and multiple compression.

The FNArena database has four broker ratings for New Hope with three Buys (or equivalent) and one Sell rating. The average target price is $5.82, which suggests -2.4% downside to the current share price (this would change dramatically if others were to follow with similar upgrades to price forecasts).

Broker views on New Hope

Following fourth quarter results on August 22 that exceeded expectations, Citi downgraded its rating for New Hope to Sell from Neutral following a 98% share price rally over the previous six months and retained its $3.00 target price.

While a warmer-than-expected summer in the Northern hemisphere increased coal burn (air conditioners) and led to record high prices, the broker felt the end of summer would reduce overall demand. Whitehaven Coal is the broker’s preferred exposure to thermal coal.

At the time, Citi did acknowledge the risk of a sustained EU gas crisis and higher-for-longer thermal coal prices.

By contrast, Morgans could see the potential for New Hope shares to drive higher following the fourth quarter results, once the market grasped the scope of cash flows and the potential for increased dividends. The broker’s target was raised to $5.50 from $4.69 and under a bullish pricing scenario a $6.30 valuation was envisaged.

At New Hope’s full year results on September 20 a total dividend payout comprised a fully franked final dividend of 31c and a fully franked special dividend of 25c, equating to a payout ratio of more than 45% of earnings (EBITDA).

Credit Suisse had previously suggested a dividend payout ratio of 45% of earnings would serve as a possible catalyst for a re-rate, and on cue, shares appeared to rally in response. While the broker’s target slipped to $7.80 from $7.90, compelling value was noted and the Outperform rating retained.

Goldman Sachs, not one of the seven brokers monitored daily in the FNArena database, retained its Sell rating following the FY22 results. This broker's target was raised to $3.80 from $3.60 on a higher valuation multiple to reflect an improved near-term earnings outlook and to align with thermal coal peer Whitehaven Coal.

The Sell rating was attributed to valuation concerns and the broker’s view of only modest production growth potential at the Bengalla operations on top of delayed approval for a water licence for the New Acland Stage 3 project.

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