Volume Upside Means Earnings Upside For Centennial Coal

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By Chris Shaw

Centennial Coal ((CEY))  matched market expectations with its profit result of $289 million for FY08, but according to Macquarie, the market is still not fully factoring in the upside earnings potential from higher exports and associated volumes.

This has the company set to deliver a step up in FY09 earnings and beyond, with the broker estimating earnings per share (EPS) can increase from the FY08 result of 20.1c to 66.7c in FY09 and 109.1c in FY10 as the Airly project comes online.

This renewed focus on exports has brokers moving to lift their estimates in coming years. JP Morgan has added around 10% to its FY09 EPS forecast. This puts its forecast at 80.2c, with FY10 expected to increase further to 127c. Others in the market are similarly optimistic, with ABN Amro forecasting EPS of 65.6c in FY09 and 86c in FY10, while Deutsche Bank is at 66c and 72c respectively. The FNArena database shows consensus earnings forecasts of 67c in FY09 and 98.6c in FY10.

With such strong earnings growth expected, it is little surprise most brokers are positive on the stock. Deutsche Bank notes that not only are volumes expected to increase, but so too are margins, as the company does a good job in holding down costs.

As well, the broker points out strong cash flows mean the company should be effectively debt free within 12 months and therefore looking to lift dividends. Of note, ABN Amro estimates the stock could yield as much as 6.8% in FY09 and this has yet to be factored in to its numbers.

The other area of possible upside comes from higher coal prices, with Deutsche and ABN Amro expecting higher contract prices to be negotiated in the next Japanese financial year, when such prices are usually set. This helps justify the post result increases in price targets, with the average price target according to the FNArena database increasing to $6.35 from $6.14 prior to the profit result.

The database shows a total of six Buys and two Hold ratings and in a reflection of investor confidence in the company’s outlook, Centennial shares have risen today despite a weaker overall market. As at 12.15pm, the stock was up 11c at $5.13, which compares to a trading range over the past 12 months of $2.71 to $6.40.

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