More Dividends Likely From Whitehaven Coal

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

Brokers look forward to more stable operating conditions for Whitehaven Coal in FY20 and expect higher dividends are likely until the company's growth projects require the cash.

-Strong performance at Narrabri expected to alleviate concerns going forward
-Macquarie assesses scope for special dividend, pay-out above policy
-Share price implies overly bearish outlook for coal prices, Morgans suggests
 

By Eva Brocklehurst

Whitehaven Coal ((WHC)) finished FY19 with robust production outcomes and brokers look forward to the dividend announcement in the FY19 result. There were operating challenges that affected FY19 and expectations for FY20 centre on more stable operations.

Morgan Stanley believes the FY19 production results are positive and there is good value in the stock at current levels while Credit Suisse observes no material disappointments with production, noting dividends are likely to be paid out above the policy range until growth projects demand the cash.

Management has indicated that projects are likely to be sequential in nature and can be managed within current facilities. Yet Shaw and Partners asserts this overlooks a conundrum: should excess cash be distributed to shareholders or retained for future growth?

The company has built up a large coal inventory as run-off-mine production was ahead of saleable coal production in FY19. An inventory of 3.4mt is expected to unwind over the first half of FY20.

The main positive for Shaw and Partners was better coal prices but this was countered by a miss on saleable production and sales. The broker believes, with a couple of the smaller/maturing mines depleting soon, core assets need to deliver less volatile production.

While Shaw and Partners likes the assets and the valuation uplift since the low in early 2016, headwinds to coal prices, issues with operations and delays to growth projects mean it has been "short" for some time.

The -40% retracement in the share price from its mid 2018 highs has been noted yet the broker, not one of the seven stockbrokers monitored daily on the FNArena database, retains a Sell rating with a target of $2.99.

The strong performance from Narrabri should alleviate investor concerns, Wilsons suggests. The broker believes the market will like the fact that Narrabri production was well above guidance (5.6-6.0mt) for FY19 at 6.4mt. Wilsons, also not one of the seven, has a Buy rating and $5.20 target.

A reassessment of Vickery's projected timeline, while disappointing, signals to UBS that any delay to construction should mean the dividend pay-out ratio remains above the stated 20-50% of earnings. Despite the higher pay-out the broker still expects the company to reduce debt through FY20.

Dividend

UBS is forecasting a record profit, with FY19 net profit of $530m, up 1%. The broker suspects Whitehaven Coal disappointed investors at the interim result, as the dividend was lower than expected. This is likely, therefore, to be made up at the full year result.

The company now expects to make a decision on Vickery in early 2020, as opposed to the end of 2019, and South Winchester resource estimates are expected later this year. Credit Suisse assumes a $0.23 dividend in August, a 100% pay-out of second half earnings.

Given the delay at Vickery and strong free cash flow Macquarie believes there is scope for a special dividend. The broker forecasts a final dividend of $0.27, which includes $0.12 as a base and $0.15 as a special. The production outlook for FY21 and FY22 is flatter, resulting in a -2% and -4% reduction to estimates, respectively.

Prior production issues at Maules Creek and Narrabri appear to be under control yet Morgans suspects there may be upside risks to costs in the second half, because of lower saleable production.

Price Outlook

The outlook for thermal coal is weak.  In the June quarter realised thermal coal prices were US$84/t. Tepid demand, poor producer discipline in some fuel switching into gas are affecting the price. Thermal coal prices, ex Newcastle, have corrected by around -40% from peak above US$120/t in mid 2018. Prices are now driving marginal tonnage out of the market and Morgans assesses spot pricing is heading towards US$80/t.

The impact to the broker's estimates and valuation from pricing is partially offset by lower assumptions for the Australian dollar. However, the company share price implies a flat coal price of US$75/t in perpetuity and no value to either Vickery or Winchester. This appears overly bearish, Morgans asserts.The stock needs a coal price catalyst as the physical market is sluggish and the broker suggests this provides an accumulation opportunity for patient investors.

Credit Suisse assesses capital management in August and the pricing of thermal coal are the near-term drivers of the stock. The challenge for holders of the stock, as well as management, the broker asserts, is whether the equity market will continue to discount pure-play coal exposures, despite strong free cash flow yields and balance sheets.

Metallurgical (coking) coal realised prices were well ahead of UBS estimates, at US$107/t in the June quarter, supported by the Maules Creek premium and helping to offset lower sales volumes. Yet, relatively weak price realisations for metallurgical coal highlight the constraints in pushing additional volume into a small market, in Citi's view.

Metallurgical coal production at Maules Creek in FY19 represented 25% of output but was just 17% in the June quarter. Maules Creek thermal coal obtains a fixed US dollar premium for low ash so, as Citi points out, when coal prices are lower the percentage premium is higher. In contrast, Narrabri thermal coal was sold at a discount in the quarter, reflecting its higher ash content and given earlier mining difficulties.

There are seven Buy ratings on FNArena's database. The consensus target is $4.83, signalling 26.5% upside to the last share price. The dividend yield on FY19 forecasts 10.6% and on FY20 is 6.5%.

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