Sentiment Improving For Macarthur Coal

This story features FELIX GROUP HOLDINGS LIMITED. For more info SHARE ANALYSIS: FLX

The company is included in

By Chris Shaw

The last six months or so has been a volatile time for Macarthur Coal ((MCC)) as the company has experienced production disruptions from flooding that required it to declare force majeure on its contracts and a reshuffling of major shareholders that for a while had the stock top of the list of likely takeover targets on the Australian market.

The group’s quarterly production report showed the former issue is being addressed as full year coal sales of 3.94 million tonnes were a little better than the market had expected and above previous guidance of 3.6 million tonnes thanks to some decongestion at the Dalrymple Bay terminal.

ABN Amro suggests the market itself has reacted too much on the downside in share price terms now the potential for corporate activity is fading. The broker notes the stock is effectively controlled by its three main shareholders with Mittal holding 19.9%, POSCO 10% and CITIC 20.3%, the first two wanting to protect their access to coal supplies and the latter clearly defining itself as a long-term holder.

This means the chances of a takeover offer for the whole company are fairly slim at present but this doesn’t in the broker’s view justify the share price correction that has occured as the stock has given up almost 25% of its value in recent weeks.

It also means the stock is a Buy simply on fundamentals now given it is trading on a FY09 P/E (price to earnings) multiple of only 7.4x on the broker’s earnings per share estimates of 203.4c in FY09 (it is forecasting FY08 earnings of 26c) while offering a yield of 6.7%. As well, there is some upside risk to forecasts in the broker’s view given the coal market remains tight, meaning contract prices could go higher again when negotiations for the next Japanese financial year are completed.

UBS agrees the stock offers value at current levels and has similarly upgraded the stock to Buy from Hold, pointing out on its numbers the shares are on a FY09 P/E of 6.7x and in FY10 of 3.7x, which is below what its peers are trading on. This comes despite a forecast capitalized annual growth rate in earnings on the broker’s estimates of 37% for the period from FY08-FY10, which will be driven largely by expanding port capacity at Dalrymple Bay.

The broker’s numbers are a little above those of ABN Amro as it is forecating earnings per share of 42c this year and 226c in FY09, while consensus forecasts according to the FNArena database are 27c this year and 191.6c in FY09.

Not everyone in the market agrees though as Merrill Lynch has not moved from its Underperform rating on the back of the stronger production result. In the broker’s view infrastructure throughput, meaning the amount of coal that is loaded at Dalrymple Bay, remains a key risk for the company going forward as the port is still not running near full capacity.

As an example Merrills notes while June throughput averaged 53.4 million tonnes per year compared to an average of just 45 million tonnes per year for the June half year, this remains well below capacity of 68 million tonnes. This suggests some downside risk to volumes in FY09 in the broker’s view as while initial guidance was for 5.1 million tonnes next year this has not been updated for some time.

The other point of concern in the broker’s view is the Coppabella mine has not yet lifted its force majeure status and this implies production risks remain to the downside, while the unwinding of the takeover premium on Macarthur leaves it preferring Felix Resources ((FLX)) and Gloucester Coal ((GCL)) in the sector.

Overall the FNArena database shows the stock is rated as Buy five times, Hold once and Sell twice, with an average price target of $16.63, up from $16.33 prior to the production report. The median price target according to Thomson One Analytics is $18.40 while the FNArena price targets range from Macquarie at $12.31 to GSJB Were at $20.11.

Shares in Macarthur today are stronger in line with the broader market and as at 12.05pm the stock was up 75c or 4.95% at $15.90, which compares to a trading range over the past year of $5.15 to $21.21.

Click to view our Glossary of Financial Terms