so tomorrow is the day.... and also the day after tomorrow
February results: Capital management the dominant focus in 2023
Key dates:
- White Haven Coal (ASX:WHC) - 1H23 result 16 Feb.
- New Hope Corporation (ASX:NHC) - 2Q production 17 Feb.
- Coronado Global Resources (ASX:CRN) - CY22 22 Feb.
- Stanmore Resources (ASX:SMR) - CY22 result 27 Feb.
- New Hope Corporation (ASX:NHC)- 1H23 result 21 Mar.
Ongoing capital management - dividends vs buybacks vs growth - will remain a key focus post results given we forecast it to comprise a far higher proportion of total TSR for the coal stocks in 2023 versus 2022.
Strong dividends may underwhelm:We forecast dividends of 50cps for WHC, 45cps for NHC (21-Mar), US 5cps for CRN and no dividend from SMR. While very solid, they are potentially below the market’s expectations, particularly when measured against large net cash balances (WHC equivalent ~$2.81ps 31 Dec).
Returns on equity buybacks compete strongly with organic/inorganic growth options for WHC and NHC. Potential ~30% FY23 EPS accretion at current prices suggests WHC is incentivized to re-start its current buyback (cost ~$1.6bn).
We think all producers will also see value in retaining dry powder for M&A optionality. SMR looks like most assertive acquirer, with clear appetite, synergies and capability at BHP’s Daunia mine should it come to market. Execution and price discipline (or not) could easily drive a disparity in stock returns, with cash not deployed likely to spill over to shareholders over time, in our view.
Hectic news flow to continue. Sector confusion often creates opportunities
We think recent domestic coal intervention (price cap, Reservation) has a bigger impact to sector risk perceptions than to valuations. However, we do expect a lift in NSW royalty rates which is a potential volatility trigger. We now price-in higher royalty structures to our updated WHC and NHC valuations in advance.
Thermal coal producers now on sale
Sector P/NPV multiples below 0.75 for the thermal coal stocks are at their lowest levels since late 2021. Trading on FY23F FCF yields of 33-39%, WHC and NHC look sharply oversold, not helped by rotation out of the crowded energy trade (warm winter), and disbelief that strong NEWC pricing can be sustained.
Our positive view on the sector is driven by belief in strong upside risk to medium-and long-term price expectations (both thermal and met), driven not by demand, but by ongoing disappointment in existing supply (labour, logistics, costs) and by growing barriers dis-incentivising the development of new/replacement supply (ESG, capital, financing, regulatory risk).
We haveAdd recommendationson all the producers but explain in our company summaries why their individual traits suit different varying investor types/goals.
https://www.morgans.com.au/Blog/2023/February/Coal-Producers-Capital-Management-Focus-through-February-Results
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