Company Overview: New Hope Corporation Limited is an Australia-based diversified energy company. The Company's principal activities include coal mining, oil and gas, marketing and logistics, and investments. It operates through four segments: Coal mining in Queensland, which includes mining related exploration, development, production, processing, transportation, port operations and marketing; Coal mining in New South Wales, which includes mining production, processing, transportation and marketing; Oil and gas, which includes oil and gas related exploration, development, production and processing, and Treasury and investments, which includes cash, held to maturity investments and available for sale financial assets. The Company also has its business interests in port operation, agriculture and technologies. It has two open cut coal mines in South East Queensland that produce thermal coal: New Acland and Jeebropilly.
 

NHC Details

July’19 Quarter total coal sales up by 32% on pcp: New Hope Corporation Limited (ASX: NHC) is a small-to-mid cap diversified energy company with the market capitalisation of ~$1.92 Bn as of 04 September 2019. The principal activities of the company consist of (a) coal exploration and project development in Queensland; (b) coal extraction and processing in Queensland and New South Wales; (c) marketing and logistics; (d) agriculture; and (e) exploration, development, production and processing of Oil and Gas. In FY18, its important geographical revenue segments were Japan (36.62%), Taiwan/China (35.84%), Korea/Indonesia (3.59%), Vietnam (1.09%), India (1.40%), Australia (7.87%), Chile (0.82%) and others (12.76%). Looking at the historical performance over FY15 to FY18, total revenue of the company has grown with a compound annual growth rate (CAGR) of 28.71% and its bottom-line has grown from a loss of $21.8 Mn in FY15 to profit of $149.5 Mn in FY18. During July’19 Quarter, total saleable coal production was 39% higher, and total coal sales were 32% higher than the prior corresponding period, mainly due to the increased ownership in the Bengalla mine. The full year production was reported at 10.9 mt, which was the highest in the company’s history. The company’s share of coal produced at Bengalla during the Quarter stood at 2.0 mt, representing an annualised run rate performance of 10 mtpa (100% basis). During the period, drilling activity saw 29 holes drilled for a total of 3,184 metres across North Surat (Taroom project), New Lenton and Captains Mountain. The pre-feasibility study for the North Surat project is about to complete.

On the backdrop of decent top-line and bottom-line performance, profitable margins, ongoing projects, and positive coal outlook in South Asian Nations, the company is expected to deliver a sustainable return for its shareholders in the coming times.


July Quarter Production Metrics (Source: Company Reports)

An Update on Bridgeport Energy (Oil & Gas) and Pastoral Operation (Agriculture): Oil production totalled 98,385 barrels at Bridgeport for the July’19 Quarter, where 91,383 barrels of oil sold which is in-line with the prior corresponding period. The average realised oil price for the quarter was reported at A$98/bbl. During the Quarter, workovers at the Inland field were completed, which increased production from the field. At the end of Quarter, Bridgeport’s Drill Rig No. 1 had commenced two months of preventative maintenance, equipment recertification and some further modifications ahead of the upcoming drilling programme.

While, the company witnessed below average rainfall at Acland Pastoral operations for the Quarter, which negatively impacted grazing pastures and planting of winter crops. During the period, an oats crop was planted and was being used for in crop grazing of weaners. Growth for Dry land barley was marginal; however irrigated oats and barley crops progressed well under the recently installed 72HA pivot irrigator footprint.

Safety Performance: The company experienced a disappointing result for July month ended quarter, with 7 people experiencing a recordable injury. In order to address such major concerns in future, the company commenced a critical risk management program in July 2019. The program included personnel from each site attending a 2-day Risk Workshop in Muswellbrook. Over the 2 days, a risk assessment was conducted to establish the health and safety critical risk profile for the business. This critical risk project will continue throughout the next two years. A comprehensive review will be undertaken of each critical risk and critical controls will be agreed and defined.

H1FY19 Net Profit After tax before Non-Regular Items up by 33% on pcp: Revenue for the first half of FY19 increased by 21% to $616.7 million as compared to the previous corresponding period. Profit before tax and non-regular items was reported at $228.9 million, which was up 33% over the prior corresponding period. Earnings Before Interest, Tax, Depreciation and Amortisation, before non-regular items increased by 31% to $285.1 million as compared to the previous corresponding period. Net profit after tax before non-regular items increased by 33% on pcp to $159.8 million. This strong result can be attributed to the company’s increased stake in the Bengalla coal mine from 40% to 70%. Increased production at Bengalla saw the mine delivering a net profit before tax of $126.6 million for the period. Queensland mining operations contributed a net profit before tax of $110.9 million. Before non-regular items, basic earnings for the six months period were reported at 19.2 cents per share as compared to 14.5 cents per share in the previous corresponding period.

The Board of Directors declared a fully franked interim dividend of 8 cents per share.


H1FY19 Profit Before Tax and Non-Regular Items (Source: Company Reports)

Net Debt reported at $103.5 Mn at the end of H1FY19: During the half year, the Group entered into a secured loan facility for $600 million with a syndicate of Australian and international banks. The Group had been debt free since 2006 prior to the draw down for the Bengalla acquisition. Net debt as on January 31, 2019 was reported at $103.5 million, and the debt facility available for draw down was reported at $390 million.
 

H1FY19 Cash and Debt Facilities Data (Source: Company Reports)

Coal Export increased by 5% to 4.4 mt in H1FY19: Total production for the six months period increased by 5% to 4.7 mt from 2018. Production in 1H19, at Jeebropilly and Bengalla, increased by 15% to 0.4 mt and 23% to 2.4 mt, respectively from 2018, whereas the production at New Acland decreased by 13% to 1.9 mt from 2018. As per coal sales volumes, the company exported 4.4 mt in the six months period, an increase of 5% from 2018, while the domestic supplies stood at 0.1 mt, a decrease of 57% from 2018.


H1FY19 Production and Sales tonnage Metrics (Source: Company Reports)

FY18 Revenue from Operations increased by 28% to $1,079 Mn (y-o-y): Net profit after tax (NPAT) and before non-regular items for the period was reported at $253 Mn, which was up 96% on the previous year. After non-regular items, the company reported NPAT of $149.5 Mn for the period. Revenue from operations increased by 28% to $1,079 Mn on the previous year. Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) before non-regular items increased by 60% to $453 Mn on the previous year. The company produced positive cash operating surplus of $434 Mn (before interest and tax).

NHC’s share of coal production at Bengalla increased to 3.8 Mn tonnes, providing the company with a profit before income tax of $181.9 Mn. Oil production continued to increase at Bridgeport Energy with a record 373,875 barrels produced during the year, which led to a 56% increase in revenue with an EBITDA contribution of $8 Mn.


FY18 NPAT Analysis (Source: Company Reports)

Recent Updates:
Colton Project Update: On July 12, 2019, in a proceedings against Wiggins Island Coal Export Terminal Pty Ltd (WICET) and others in the Supreme Court of New South Wales, NHC and its relevant subsidiaries were successful in obtaining a declaration that the Company was not bound by a Deed of Cross Guarantee to guarantee the debts of Northern Energy Corporation Ltd (in liquidation) and Colton Coal Pty Ltd (in liquidation). On 20 August 2019, WICET filed an appeal with the Court of Appeal in New South Wales in relation to the Supreme Court’s decision, and the related update will be provided in the near future.

Change in Directors Interest: Shane Oscar Stephan acquired 237,500 Shares and disposed 250,000 Performance Rights, taking the final holdings to 673,865 ordinary shares and 420,641 performance rights, effective from August 23, 2019.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 73.59% of the total shareholding. Washington H Soul Pattinson and Company Ltd and Mitsubishi Materials Corp hold maximum interest in the company at 49.98% and 11.21%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its gross margin, EBITDA margin and net margin for H1FY19 stood at 51.6%, 46.7% and 19.5%, better than the industry median of 51.2%, 36.0% and 18.6%, respectively, which implies decent fundamentals for the company. Its ROE for H1FY19 stood at 6.2%, better than the industry median of 5.6%, which implies the company generated better returns for its shareholders than its peer group. Its debt to equity ratio for H1FY19 stood at 0.11x, lower than the industry median of 0.57x.


Key Metrics (Source: Thomson Reuters)

Key Risks: The company is susceptible to certain risks such as failure of infrastructure, market forces (commodity price risk and foreign currency risk) and risks associated with climate change.

What to expect: High-quality thermal coal is expected to play a critical role in improving the environmental credentials of South East Asia’s energy portfolio without jeopardising reliability of supply or significantly increasing electricity generation costs. Limited availability of these high-quality coals and the increasing regulatory barriers to the development of new mines will constrain the supply side response from Australian coal producers. These fundamental market forces provide a strong foundation for prices of high-quality thermal coal over the long term. Lower quality thermal coal pricing will continue to be heavily influenced by Chinese import levels and, in the longer term, Indian import demand.

Moreover, Company’s Asian customers are continuing to invest heavily in new High Efficiency Low Emission (HELE) coal fired power stations. These large and long-term investment decisions provide a foundation of demand for its products into the future. The company has a portfolio of high-quality assets, a conservative balance sheet and experienced workforce with enviable credentials of delivering socially responsible and profitable mining operations throughout the price cycle.

The Company has also secured a five-year debt financing package, which delivers certainty of funding to underpin the Group’s growth initiatives over the medium term whilst maintaining a conservatively geared balance sheet. Its focus over the next few months will now be on maximising the long-term value of these assets.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1: Price to Earnings based valuation

Price to Earnings based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months

Method 2: Price/Cashflow based valuation
 

Price to Cashflow Multiple Approach (Source: Thomson Reuters) *NTM-Next Twelve Months  

Method 3: EV/EBITDA Multiple Approach

EV/ EBITDA Multiple Approach (Source: Thomson Reuters) *NTM-Next Twelve Months  

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: New Hope Corporation Limited’s shares generated a negative YTD return of 29.79% and is trading close to 52-weeks lower level of $2.090 with a reasonable PE multiple of 12.490x, indicating a decent opportunity for accumulation. Fundamentally, the company has performed well on its financial books, as its EBITDA margin and net margin for H1FY19 stood above the industry median. Its gross margin improved in the first half of the financial year 2019 as compared to the previous corresponding period. Its debt-to-equity ratio shows that the company is less leveraged than its peer group and is utilizing its own funds to fuel the projects. 

Moreover, coal demand is expected to grow in the countries such as India and South East Asia, till the year 2040. It will help the coal producing companies to deliver sustainable value to its customers and shareholders. With the decent volume growth visibility, healthy balance sheet, respectable operating margins and return ratios, we have valued the stock using three relative valuation methods, P/E multiple, Price to cashflow multiple and EV/EBITDA multiple, and have arrived at the target price upside in the ambit of $2.55 to $3.08 (double-digit growth (in %)). Hence, we recommend a “Buy” rating on the stock at the current market price of $2.260 per share (down 2.165% on September 4, 2019). 


NHC Daily Technical Chart (Source: Thomson Reuters)

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