We have upgraded Felix Resources to a BUY recommendation (previously Underperform) with a $19/sh price objective. The stock has fallen around 30% in the last four weeks. We believe these prices represent value, trading on 6.7x FY09E earnings and a NPV of $14.82/sh.
Positive value triggers
We see potential for upside to our coal price forecasts. We have modelled JFY08 semi-soft coal annual contract prices of US$220/t, the bottom end of the market’s current expectations of US$220-260/t. The recent dismissal of court action against the Moolarben thermal coal project (42% of NPV) reduces valuation risk. The company has a 15.3% stake in the NCIG port currently under construction with significant strategic value.
Thermal coal fundamentals have not changed
Strong demand from Asia, the risk that China bans or significantly reduces thermal coal exports, South Africa power generation issues and Australian infrastructure constraints are all positives for thermal coal prices. The sell down in European thermal coal, following a huge rally, has no impact on these drivers.
BUY - Price objective $19/sh
We have reduced our price objective to $19/sh from $21/sh. Our price objective is 8x FY09E earnings, a conservative level given our thermal coal forecasts are below spot prices and our semi-soft forecast is under current market expectations. We expect further positive news flow on semi-soft coal price settlements and the Moolarben thermal coal project. Felix Resources and Gloucester Coal (GCRLF, BUY, B-1-8) are our preferred ASX coal exposures over Macarthur Coal
FLX Price at posting:
0.0¢ Sentiment: ST Buy Disclosure: Held
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