Whitehaven Coal Rebounds But Risks Rise

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

Brokers were satisfied with Whitehaven Coal’s June quarter performance but earnings forecasts fell across the board, one broker calling a transition tipping point.

-Sales and cash top performers
-Strong cash position yields growth options
-Costs meet forecasts but inflation persists
-Everything hangs on coal prices
 

By Sarah Mills

Whitehaven Coal’s ((WHC)) June quarter report broadly met broker’s expectations following revised guidance, but brokers are divided on the outlook.

The company enjoyed a sharp rebound in the quarter from a weak March quarter as all open pit operations recovered from weather and operational issues.

Sales and realised prices proved the big-ticket item, the company netting a 10% premium to the Newcastle price (although it still disappointed some broker’s expectations).

The strong quarter left Whitehaven Coal with net cash of $2.65bn, plenty to play with, and brokers expect it will be directed largely to shareholder returns by way of buybacks, and leaves the company with plenty of growth options.

Some brokers point to the merger and acquisition prospect, suspecting the company is may participate in BHP’s ((BHP)) asset sales, BHP’s Daunia mine proving the favourite candidate. Others doubt this is on the cards.

Costs were sharply higher in the quarter (but well within consensus forecasts) and Whitehaven’s management advised on a conference call that inflation persists.

Most brokers are adjusting estimates to accommodate this expectation.

Everything Hangs On The Coal Price

As a result, brokers largely acknowledge the coal price will be critical going forward and forecasts are mixed. 

Earnings forecasts broadly eased, broker’s doubting a sharp uptick in production will save the day, and many expecting a softening in the global economy and a resulting fall in coal demand.

Capital management and M&A

Whitehaven Coal’s impressive cash position drew considerable speculation as to what the company might do with all its money.

The company’s buyback accelerated in the June quarter, the company buying a total of $370m in shares in the June half, which leads some brokers to revise down their June-half dividend forecasts.

Most brokers expect the buyback to continue in FY24 and UBS expects an FY24 payout of $500m.

Meanwhile, Whitehaven enjoys no shortage of growth options.

Its strong cash position places it in a better position to finance projects than might have been the case given the company is finding it harder to gain finance for thermal projects domestically.

This leads UBS to posit that, out of buy vesus build versus buyback options, the global backdrop favours the buy option.

Whitehaven Coal has flagged its intention to grow its metallurgical coal arm and brokers observe the company is eyeing up BHP’s asset sale, particularly the Daunia mine in Queensland.

Morgans believes the market had discounted Whitehaven Coal, doubting its ability to compete for these assets, a situation which has now changed. 

However, it estimates the company’s FY23 distributions, as well as the full-scale Vickery development, is likely to stay its bidding hand.

The market is awaiting FY24 guidance in August and possibly news on this front.

Brokers Have Their Say 

Citi is on the side of rising coal prices, observing realised prices hit a record average of US$445/t in FY23 versus US$325/t in FY22. The broker believes the Newcastle coal price forecast appears low given resilience in spot pricing.

As a result, the broker retains a Buy, High Risk, rating and $7.80 target price.

Ord Minnett also takes a positive view and Whitehaven Coal remains its top thermal coal sector pick, the broker appreciating its high-quality thermal mines and pipeline for metallurgical coal.

But the broker does spy headwinds for FY24, citing costs, a delayed tax payment to the December half, and Werris Creek closure and capital expenditure.

All up, the broker retains a Buy rating and its target price edges up to $8.40 from $8.30.

Morgan Stanley expects Whitehaven Coal’s strong finish to FY23 positions it well heading into FY24, production and costs both outpacing the broker’s forecast.

The broker also notes a strong build of run-of-mine stock at Maules and observes mining at Narrabri is moving into shallower territory and more predictable production. 

Labour costs remain a sticking point, weather appears to be improving but pricing disappointed given the broker’s expectations sat 13% higher than those reported.

Overweight rating and $7.95 target price retained.

Macquarie is also a believer, appreciating the company’s impressive cash position. The broker maintains Whitehaven Coal is well position to deliver shareholder returns and organic and inorganic growth.

The broker observes a softening outlook heading into FY24 and downgrades EPS forecasts -7%. Outperform rating and $7.70 target price retained

Goldman Sachs was disappointed, after the Narrabri underground mining challenges (with the long-wall move) ate into the broker’s expectations. Contractor labour, equipment delays and a slower ramp-up also disappointed. 

Pricing also fell shy of the broker’s forecast, the broker citing a pricing lag and a lower proportion of the high calorific value Maules Creek coal in the mix.

But Maules Creek’s June quarter outpaced the broker’s forecasts and the Narrabri drawdown of run-of-mine stocks also improved the picture. 

Neutral rating retained. Target price rises to $8 from $7.80.

UBS adopts a middling position, citing the possibility that thermal coal prices could fall as global growth slows and the energy complex weakens as the transition advances.

But the broker expects the coal price will rise 10% over the long term, helping offset expectation of tighter labour conditions (UBS increases its FY24 total cost forecast by 12%). The broker also mentions the activist-driven federal court challenge to the Narrabri extension in September.

The broker retains a Neutral rating and $6.75 target price.

Then the bears line up, citing rising transition costs.

Decarbonisation Costs Hit The Picture

Whitehaven Coal announced the beginning of its decarbonisation costs, expecting an impost of $1/t for carbon offsets (not including studies to cut emissions).

Goldman Sachs expects this will be factored into FY24 cost guidance.

As a result, brokers estimate that this will translate into a $0.5 increase in costs per tonne until 2030. 

Evans & Partners says the discrepancy reflects the fact that part of Whitehaven’s estimate relates to the fact that Narrabri will be operating in a high methane area in 2024. 

Evans & Partners also believes the marketing may be overestimating production and cuts its FY24 forecasts to reflect the slower ramp-up at Narrabri in early FY24 and sits below production consensus.

But again, the broker says everything depends on the coal price. Higher costs will be an issue if coal prices fall but if they move higher, the broker suggests Whitehaven appears cheap. 

The broker also observes a potential rise in demand from Asia and considers the long-term outlook for coal to be positive given strong non-OECD demand and structural supply issues.

Neutral rating retained. Target price falls -3% to $7.30. EPS forecasts fall -6% for FY24.

Bell Potter Calls Transition Tipping Point

Bell Potter proved the big bear, calling a structural fall in the thermal coal price going forward as transition dynamics kick in.

While Whitehaven Coal’s June-quarter result broadly met Bell Potter’s forecasts, the broker posits weaker coal prices will naturally translate into less funds for shareholder returns; and also spies production growth and labour challenges.

But these paled besides the industry’s broader structural challenges.

“Over the long term, we expect a fragmented supply response across all regions and all energy technologies will reshape the energy economy away from thermal coal,” asserts Bell Potter.

The broker observes that thermal coal exposures are also increasingly excluded from lender and equity mandates, leading to higher costs of capital.

This observation was echoed by Goldman Sachs, which reported that Whitehaven’s management advised it had encountered growing difficulty finance thermal coal projects, and were therefore engaging with overseas capital.

Bell Potter believes the thermal coal markets are now well supplied and cuts its FY24 EPS forecasts by a whopping -46% and -37% in FY25 to reflect its thermal price outlook (down -25% to US$150/t in FY24 and -20% to US$130/t in FY24).

Bell Potter retains a Hold rating and its target price falls to $6 from $7.

Averaging It All Out

In the wash, the average target price among brokers monitored daily by FNArena for Whitehaven Coal fell -22% to $7.74 from $7.91 following publication of its June-quarter report. The database shows five Buy and two Hold or equvialent ratings.

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