Yancoal Oz Under Pressure From The Start

This story features NEW HOPE CORPORATION LIMITED. For more info SHARE ANALYSIS: NHC

 – Yancoal delivers messy interim result
 – Weak coal markets impacting on earnings
 – High debt and a lack of liquidity remain issues for investors
 

By Chris Shaw

Given Yancoal Australia ((YAL)) was only created in the June half year there was no surprise the company delivered a messy set of numbers. Underlying net profit after tax for the half was $42.3 million, while reported earnings for the half of $415.7 million included a gain on the acquisition of Gloucester Coal of $218 million.

Commentary from management indicated coal markets are expected to remain weak and volatile through the balance of 2012. As Credit Suisse notes, this has left management targeting lower costs and capex to offset the weaker operating conditions.

This may not be enough to avoid a further capital raising or the issuing of more debt, as Credit Suisse notes Yancoal's gearing stands at around 65% and there is estimated planned capex spending of around $2.4 billion between 2012-2016.

A recent debt refinancing should be a positive in this regard, but with cash on hand as at June 30 of $343 million and net debt of $3.165 billion Credit Suisse suggests Yancoal's financial position remains under some pressure.

One positive in the result for Citi was that production growth for Yancoal remains on track. Equity coal sales this year is forecast to hit 14.2 million tonnes against the 13.4 million tonnes sold in 2011. While some growth options are under review given an environment of high capex and moderate coal prices, Citi expects quality projects such as Moolarben, the Gloucester Basin and Yarrabee will be approved. 

This implies production volumes for Yancoal could reach 20-24 million tonnes by 2015, while RBS Australia has adopted conservative sales growth assumptions in initiating coverage on the stock by forecasting total sales of 23 million tonnes by 2016.

There is scope for some improvement in coal markets shorter-term in Citi's view, the broker expecting export coal prices will firm to around US$100 per tonne by the end of this year. Re-stocking by power utilities prior to the northern winter is expected to be the primary driver of thermal coal price gains.

Such an improvement in coal markets is unlikely to generate a more positive response from investors in the view of RBS, as Yancoal's high debt levels are likely to limit appeal. Limited liquidity in the stock given the stake held by parent company Yanzhou Coal and an aggressive growth mandate are also likely to limit the attractiveness of Yancoal shares in the broker's view.

This is enough for RBS to initiate coverage with a Hold rating, the broker continuing to prefer New New Hope Corporation ((NHC)) for listed coal sector exposure. The majority of brokers agree with the view of RBS, as the FNArena database shows Yancoal is rated as Hold three times against one Buy. 

This comes courtesy of Credit Suisse and reflects significant valuation upside relative to the broker's $1.50 price target. Price targets range from RBS at $1.25 to Macquarie at $1.80, with a consensus price target of $1.51. This is down from $1.60 prior to the result and RBS's initiation.

Despite having the top target in the database Macquarie reiterated a Hold rating on Yancoal after the interim profit result, this given the view ongoing weakness in coal markets could pressure margins over the remainder of this year at least.

 
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