Centennial Coal The Defensive Coal Play

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

By Chris Shaw

The market now understands coal prices are heading lower at the upcoming contract negotiation period, but as Deutsche Bank points out, some companies are better placed than others to weather the tougher conditions.

One of those companies in the broker’s view is Centennial Coal ((CEY)) as it is biased towards steaming or thermal coal for both domestic and export markets rather than metallurgical coal markets where prices are expected to fall more heavily. As well, the broker notes while the company’s focus on thermal coal is a positive given it is a safer exposure in the current environment, the move to increase the amount of production being sold into export markets is also a positive given higher margins in that market.

Currently the company exports around 28% of output and management is targetting a 30:70 split eventually, something the broker expects it will achieve.

Another factor in the company’s favour, in Deutsche Bank’s view, is itsoperating performance. As proof of this, the company’s December quarter result delivered some positive trends in terms of both production and sales when compared to previous periods. This was enough to see the broker lift its current year numbers, though future year forecasts were cut slightly.

Macquarie agrees as it viewed the quarterly production data as a little better than it had expected, though it too points out demand is falling and this will impact the company’s financial performances going forward. Having factored much of this in previously, the broker makes only minor changes to its estimates post the quarterly production result. This also means there has been no change to its view the company is the top pick in the sector, in particular because of its emphasis on driving export volumes.

JP Morgan also takes the view the company is the top defensive play in the sector, while Bank of America-Merrill Lynch sets the stock at number two behind Felix Resources ((FLX)). Overall, the FNArena database shows the company is rated as Buy five times and Hold four times with an average price target of $3.41. This is down from $3.90 prior to the release of the production report.

The major change comes courtesy of Macquarie cutting its target to $3.35 from $5.12, which brings the broker more into line with the rest of the market. Shares in Centennial today are stronger as investors agreed with the generally positive comments from analysts and as at 2.30pm the stock was up 24c or 10% at $2.58. This compares to a trading range over the past year of $2.24 to $6.40.

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