Australia | Apr 28 2011
– Wet weather impacts on Macarthur's March quarter
– Some carryover of lower priced coal sales expected
– Brokers generally view stock as fair value at current levels
By Chris Shaw
Wet weather played havoc with operations for Macarthur Coal ((MCC)) in the March quarter, with saleable coal production down 56% relative to the previous corresponding period and sales down 61% on the same basis.
JP Morgan notes the March quarter was the weakest for both production and sales since Macarthur listed in 2001. Given the negative after effects of the wet weather continue to impact on operations, Macarthur's force majeure declaration remains in place.
The lower production recorded in the March quarter meant Macarthur again had greater volumes of coal contracted than it could produce. According to Macquarie, this means there is likely to be up to at least one month of carryover production at 3Q11 prices before prices revert to current market rates. This implies a delay to the positive impact of 4Q11 price increases already negotiated.
The other issue in while production may soon return to more normal levels, low stockpiles mean output is unlikely to rise significantly above steady state in the near-term. For Macquarie, this suggests some downside risk to Macarthur's FY11 sales guidance of 4.1-4.3 million tonnes.
Forecasts reflect this, as Macquarie is estimating FY11 sales of 3.9 million tonnes and RBS Australia has trimmed its estimate to 4.0 million tonnes from 4.1 million previously. UBS is also at the lower end of Macarthur's guidance range with respect to sales volume expectations, while also suggesting there is scope for spot metallurgical coal prices to weaken post the wet season.
This is based on the view there is likely to be a near-term volume impact from the Japanese steel industry as it recovers from the recent earthquake and tsunami. Credit Suisse disagrees, suggesting coal prices are likely to remain higher than expected through 2011.
The Credit Suisse view implies earnings upgrades for Macarthur for FY12. Credit Suisse's estimates factor this in, as in earnings per share (EPS) terms the broker is forecasting 64c this year and 135.9c in FY12. The latter forecast is about 40% above market consensus EPS forecasts according to the FNArena database of 63.4c and 105.8c respectively.
Post the production report market forecasts have been revised, RBS Australia cutting its FY11 earnings forecast by 8.8% while lifting its FY12 estimate by 62%. Deutsche Bank has made more modest changes in trimming estimates by 2% and 4% respectively in FY11 and FY12, while JP Morgan's changes were closer to those of RBS as FY11 estimated were reduced by 9% and FY12 numbers lifted by around 40%
Ratings for Macarthur are unchanged, the FNArena database showing two Buy recommendations, five Holds and one Sell. The consensus price target is little changed at $12.50, up from $12.43 prior to the production report.
JP Morgan sees the issue for Macarthur shares at present as the risk of further coal sales disruptions. As this will limit leverage to higher near-term coal prices, share price outperformance is less likely.
What could create some positive news flow in the view of RBS Australia is a positive resolution to current legal action related to the acquisition of MDL162. At present RBS includes the asset at cost, but notes at the original price of around $360 million it would require higher coal prices than the market currently expects to become valuation accretive.
Macquarie agrees there is downside risk for sales in FY11, while adding Macarthur also faces some timing and cost challenges with respect to the longer-term production growth profile. Given a lack of value at present, Macquarie retains an Underperform rating.
Credit Suisse argues the value on offer in Macarthur shares is better than Macquarie suggests, taking the view even if coal prices don't stay as high as expected, Macarthur could withstand a fall of around 35% in PCI coal prices and still be trading around fair value levels.
Shares in Macarthur today are slightly higher and as at 12.45pm the stock was up 8c at $11.99. Over the past year the stock has traded in a range of $9.50 to $16.02.
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