FY12 Remains Key For Whitehaven Coal

This story features WHITEHAVEN COAL LIMITED. For more info SHARE ANALYSIS: WHC

By Chris Shaw

Whitehaven Coal ((WHC)) is generally regarded as offering value at current levels. The FNArena database shows a total of four Buy rating and two Hold recommendations with an average price target of $5.82. This compares to a closing share price yesterday of $4.61.

Macquarie is the latest to initiate coverage on the stock, the broker seeing enough potential upside to apply an Outperform rating with a $5.30 price target. The broker's positive view is supported by a combination of factors.

The first is Whitehaven has access to high quality coal in its operations, including thermal, PCI and semi-soft coal. According to Macquarie this means Whitehaven's operations lend themselves to blending coal, which both gives additional options and can add value through the upgrading of third-party products.

As well, Macquarie points out Whitehaven has a number of legacy contracts that roll off from FY12, which suggests improved pricing for its products. The timing of the these contract roll offs coincides with when production volumes should be growing strongly, Macquarie estimating by FY12 the group should deliver output of more than 10 million tonnes annually.

For Macquarie, this suggests strong leverage to what is an attractive medium to longer-term coal pricing thematic. This is underpinned by a somewhat de-risked growth outlook, this stemming from Whitehaven's 11.06% stake in the Newcastle Coal Infrastructure Group (NCIG).

The equity stake in NCIG provides port access of 3.3 million tonnes in stage 1 and an incremental 2.6 million tonnes when stage 2 is delivered. When added to 3.6 million tonnes from Port Waratah Coal Services (PWCS), Whitehaven has allocations for 9.5 million tonnes of coal by 2015. As well, Macquarie notes there is potential for this to be increased via surplus allocations.

There is some risk attached to an investment in Whitehaven, Macquarie pointing out projects such as the Narrabri underground longwall development could be subject to delays or capital cost overruns. Such an outcome would potentially have a significant impact on the broker's $5.30 valuation of Whitehaven shares.

Credit Suisse also covers Whitehaven and recently touched on the earnings outlook for the company, noting FY11 remains the major story for investors at present. Looking at next year Credit Suisse is currently forecasting earnings about 60% below market consensus, which suggests market estimates may yet come down significantly.

While this underpins Credit Suisse's Neutral rating, the stockbroker does point out earnings should grow strongly in FY12. This supports Macquarie's view on earnings, as it is forecasting earnings per share (EPS) of 11.3c this year, 19.5c in FY11 and 38.3c in FY12. These forecasts compare to consensus EPS estimates according to the FNArena database of 12.5c in FY10 and 25.7c in FY11.

In contrast to Credit Suisse, Deutsche Bank has an almost identical view on the stock to that of Macquarie. While DB notes the recent update on earnings guidance for FY10 caused a reduction in forecasts for this year, it is the growth in production expected by FY12 that underpins the value on offer in Whitehaven.

Deutsche has a price target on the stock of $6.00, while the average target according to the FNArena database stands at $5.83. Shares in Whitehaven today are stronger and as at 2.30pm the stock was up 28c or 6% at $4.90. This compares to a range over the past year of $2.69 to $6.05.

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