Australia | Aug 24 2011
– Whitehaven result beat guidance
– RBS identifies a number of positives in the result
– Production growth and M&A potential sources of upside
– Upgrades follow profit result
By Chris Shaw
Having guided to full year earnings of $70 million, coal producer Whitehaven Coal ((WHC)) exceeded this with an underlying net profit of $73.3 million. Adverse weather and legacy contracts in the period caused some significant items, meaning reported profit for the year was just $9.9 million.
In the view of RBS Australia, the market is likely to look through these legacy issues, particularly as there were a number of positives in the Whitehaven result. These include an expansion of open cut operations, which is increasing production flexibility.
RBS also notes Whitehaven's fixed price legacy contracts will roll-off entirely in the coming year, while cash production costs have also been well contained. A quality development pipeline is a further reason to be attracted to the stock in RBS's view.
The Vickery project is a key growth option for Whitehaven and here UBS is very positive, as the recently announced Boggabri joint venture is expected to facilitate development of the project. Vickery is also helping deliver increased resources and reserves, the former being boosted by 21.5 million tonnes in the June half to 1,750 million tonnes and the latter rising by 60.4 million tonnes to 426.1 million tonnes.
The additional positive in this increase is an improved product mix thanks to Vickery. Morgan Stanley agrees, noting with Vickery factored in, Whitehaven has greater exposure to the broker's favoured thermal coal market.
This increase in reserves is important in UBS's view as it is expected to enable Whitehaven to apply for increased tonnage with respect to port allocations. UBS expects an increase to 15 million tonnes annually by FY17, up from a current allocation of 10.2 million tonnes.
On UBS's numbers a successful medium-term port deal could add as much as 50c in valuation upside to Whitehaven. What should also boost valuation is an expected tripling of production growth by FY16. Factoring this in, UBS generates an increased net present value for Whitehaven of $8.19 per share, based on a port allocation in FY17 of 15 million tonnes.
Higher coal prices could lift valuations for Whitehaven further, Morgan Stanley noting coal markets in general and the thermal coal market in particular should remain tight in coming years. In support of this view, Indian demand is expected to grow strongly.
The other element at play with respect to Whitehaven is the potential for the company to be a target in any further consolidation of the Australian coal sector. On RBS's numbers Whitehaven is trading at a 6% premium to net present value at present, a level that appears modest given Felix Resources and Centennial Coal achieved premiums of 30-40% when acquired.
This supports a Buy rating from RBS, while both UBS and Credit Suisse have upgraded to Buy ratings on Whitehaven from Hold recommendations previously given the potential upside as the Vickery project in particular is incorporated into models.
Macquarie is not quite as bullish on the M&A valuation argument, noting Whitehaven recently ran an unsuccessful bidding process where the mooted price range for bids of $7.00-$7.50 per share was too high for potential suitors. To reflect this observation, Macquarie retains a Neutral rating.
The FNArena database shows Whitehaven is rated as Buy four times and Hold once, while Goldman Sachs and Morgan Stanley are not in the database but rate the stock as Hold and Overweight accordingly. The latter is within an Attractive view on the Australian coal sector.
Given some increases to valuation price targets for Whitehaven have also crept higher, the database showing a consensus target now of 7.11, up from $6.84 previously.
Shares in Whitehaven Coal today are stronger and as at 11.45am the stock was up 19c at $6.38. Over the past year the stock has traded in a range of $5.22 to $7.35, the current share price implying upside of around 11% to the consensus price target in the FNArena database.
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