One energy stock to sell – Whitehaven Coal Ltd
WHC Details
Delivered a solid performance for FY16:Whitehaven Coal Ltd (ASX: WHC) has beaten forecasts for FY16, and reported a net profit of $20.5 million for FY16 against $15.69 million of analyst estimates and loss of $342.7 million in FY15. WHC reported a record equity saleable coal production of 15.1 MT, a jump of 34% and record equity coal sales of 15.4 MT up 42%. Revenues rose from $763.3 million to $1,164.4 million during the period. Splendid rise in sales revenues have supported 72% jump in EBITDA, which was at $224.1 million. This was also strongly supported by reduction in cash cost to $56/t down 8% on prior year. Furthermore, WHC’s TRIFR was significantly below NSW average with TRIFR at 10.6 by FY16. The company generated a cash from operations of $269.3 million against $152.7 million in earlier year. After paying one off taxes to the extent of $42 million in H1FY16 and capital expenditure from Maules Creek, the company reduced its debt by $77 million to $859 million. Its leverage (Net Debt to EBITDA) reduced drastically from 7.2 to 3.8.
Whitehaven also generated consistent margins over the past two years underpinned by improving efficiency at all of Whitehaven’s operations and increasing price premium for high quality coal.
Ramp up in the production:Management said that the new high quality SSCC (semi-soft coking coal) product from Maules Creek is being sold into Japan, Korea, Taiwan and China. Furthermore, as production from Maules Creek ramps up, a proportion of total metallurgical coal sales is expected to grow over the next four years from 16% to about 40%. The company has undertaken additional drilling during FY2016 and extended open cut shell to the north of the previous mine plan.
With this, open cut reserves increased by 129 MT to 510 MT at the end of the year. The additional reserve would add another 10 years of similar high quality coal to the already long mine life at Maules Creek.
Annual coal sales by type (Source: Company Reports)
Stock performance:Management guided coal production for FY17 to the range of 21 – 22 MT with Maules Creek operating at 10.5 MTPA. WHC stock surged over 300% during this year to date (as of October 12, 2016) driven by the booming coal prices coupled with outstanding performance. The agreement with Japanese steel makers coupled with Chinese policy makers’ efforts to restrict supply by decreasing the working days has impacted the coal stock prices. On the other hand, the recent coal price rally is considered to be due to short-term supply constraints and government initiatives offshore which might change soon.
Thus, any volatility in the coal prices could lead to a correction in WHC share price and we believe investors should book profit at the current levels while the stock is trading close to its 52-week high price. Based on the foregoing, we recommend a “SELL” recommendation on the stock at the current market price of $ 2.76
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WHC Daily Chart (Source: Thomson Reuters)
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