Company Overview: Stanmore Coal Limited is a coal mining company. The Company's principal activities include the development of operation of coal mines in Queensland, Australia. The Company's segments include Isaac Plains Coal Mine, which includes the operation of the Isaac Plains Coal Mine, including the Isaac Plains East project, and All Other Segments, which includes all other exploration and development coal assets. The Company holds interests in various tenements, such as The Range, New Cambria, Belview, Tennyson, Belview North, Clifford West, Clifford East, Tennyson South, Lilyvale, Belview East and Mackenzie. The Isaac Plains project is located in Moranbah. The Belview, Mackenzie, New Cambria, Tennyson and Lilyvale projects are located in Bowen Basin. The Range and Clifford projects are located in Surat Basin.



SMR Details

Decent Top-line and Bottom-line Performance in FY19: Stanmore Coal Limited (ASX: SMR) is involved in the exploration, development, production and sale of metallurgical and thermal coal in Queensland, Australia. Looking at the historical performance over FY16 to FY19, total revenue of the company has grown with a compound annual growth rate (CAGR) of 216.62%. The bottom-line grew at a CAGR of 176.28% in the period FY17-FY19. Total revenue improved from $12.7 Mn in FY16 to $403.1 Mn in FY19, and net profit improved from $12.0 Mn in FY17 to $91.6 Mn in FY19. Net cash held at the end of the year was reported at $90.465 Mn, as compared to net cash of $19.817 Mn held in the previous year. The Company’s net margin, Return on Equity, Return on Invested Capital and current ratio stood better than the industry median for FY19.

With the positive outlook for metallurgical coal, the company is mindful of the potential for volatility as a result of the commodity cycle. The Company, in order to extract better value from such opportunity, will focus on higher margin metallurgical coal product yield and minimizing the amount of by-product thermal coal. Moreover, the company is expected to take a disciplined approach to manage its operating costs and capital investments to ensure strong cash flows in the coming times.

 
Production Overview (Source: Company Reports)

FY19 Key Highlights for the year ended June 30, 2019: Underlying EBITDA for the period was reported at $154.895 Mn, an improvement of $109.347 Mn as compared to EBITDA of $45.548 Mn in FY18. This can be attributed to a 99% increase in underlying margin of A$69.1 per tonne in FY19 as compared to A$34.8 per tonne in FY18. Net profit after tax (NPAT) for the period was reported at $91.598 Mn, as compared to $5.966 Mn in FY18. Gross revenue from coal sales increased from $190.832 Mn in FY18 to $403.036 Mn in FY19, which can be attributed to $29.0 per tonne increase in the realized price to an average of $173.8 per tonne from $144.8 per tonne in FY18, and an increase in sales of produced coal from 2,319 kt in FY19 from 1,318 kt in FY18. Moreover, the transition of the mining operations from the Isaac Plains mine to the Isaac Plains East mine during the year resulted in improved geological conditions and better coal quality, which has enabled the consolidated entity to maintain the strong operational performance and improve the sales mix achieved. Underlying FOB (Free on Board) costs for the period was reported at $104.7/t, which was $5.3/t lower than FY18. The FOB costs included $15.9/t of state royalties, which were $4.0/t higher than FY18.


FY19 Key Financial Metrics (Source: Company Reports)

Net Cash on June 30, 2019 Increased by 356.50% on Previous Year: At the end of FY19, total net cash inflow for the period was reported at $70.648 Mn. The net inflow from operating activities for the period was reported at $140.043 Mn as compared to $21.874 Mn in FY18. The net cash outflow from the investing activities was reported at $60.777 Mn, as compared to a cash outflow of $13.971 Mn in the previous year. This can be attributed to the acquisition of Isaac Downs, Isaac Plains East development capital and planned maintenance of the major equipment and infrastructure. However, no funds were drawn from the working capital facility. The net outflow from financing activities was related to the dividends paid during the year and was reported at $8.618 Mn, as compared to $15.601 Mn in the previous year. Net cash held at the end of the year was reported at $90.465 Mn, as compared to net cash of $19.817 held in the previous year.

On June 28, 2019, the group completed a debt refinance in relation to its working capital and bonding facility with existing financier, Taurus and established an additional bonding facility with Liberty Specialist markets. The new arrangement, effective from 1 July 2019, forms an important part of the group’s overall business strategy and reflects its financial strength. The restructuring will help the company to decrease its overall financing costs.

The arrangement with Taurus includes (a) extension of the existing facility to June 30, 2022 from previous November 15, 2019; (b) increase in working capital facility to US$28 Mn from previous US$22 Mn; (c) reduction of bonding facility to US$12 Mn, from previous US$29 Mn; (d) interest rate of 8% on drawn funds as compared to previous 10%; (e) unchanged interest rate on undrawn funds; (f) no change in 1% royalty payable on proceeds of sales from Isaac Plains complex; and no change in security arrangements with 1st or 2nd ranking security interests over Stanmore IP Coal Pty Limited and a number of its subsidiaries.

The group has access to $20 Mn bonding facility with Liberty, which will serve the purpose to provide financial assurance to the Queensland government as part of the company’s future rehabilitation obligations. The facility will include, (a) interest of 4.7% on drawn funds; (b) no fee on undrawn funds; (c) no financial covenants; (d) review date/facility with expiry on June 30, 2022; and (e) 3^rd or 2^nd ranking fixed and floating security interest over Stanmore IP Coal Pty Ltd (Isaac Plains and Isaac Plains East) and Stanmore IP South Pty Ltd (Isaac Downs), which include 3^rd ranking tenement mortgages over tenements held over those subsidiaries and 1^st ranking security interest over all other subsidiaries of the group.


FY19 Cash Flow Data (Source: Company Reports)
 
Recent Updates:
On August 12, 2019, the company executed a process deed with privately held company Winfield Group Investments Pty Ltd in respect of an unsolicited, non-binding, indicative proposal from Winfield Energy to acquire 100% of the shares in the company, subject to satisfactory due diligence and securing of finance. The offer up to $435 Mn represented a premium in the range of 20.5% to 36.5% (from the closing price of A$1.245 as on 09 October 2019) to the company’s indicative price between $1.5 and $1.7 per share in cash.

The company continues to remain engaged with Winfield Energy to determine if a formal and binding offer will be made to the company’s shareholders. Both the parties have agreed to extend the validity of the process deed by a further three weeks from October 7, 2019 to October 28, 2019 (all other terms of the process deeds remain the same).

Talking over possibilities of acquisition, a buyout of Stanmore Coal would turn Winfield into a majority coking coal producer, potentially making finance easier to access, as banks have been pulling back from lending to thermal coal projects due to climate change concerns and investor pressure. With premium pricing over the company’s attractive valuation, shareholders are expected to benefit from the transaction deal. The company, however, has reiterated that there is no certainty that a transaction with Winfield Energy will eventuate.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 74.99% of the total shareholding. United Fiber System Ltd. and Latimore Family Pty. Ltd. hold maximum interests in the company at 28.42% and 18.37%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its gross margin and EBITDA margin improved from 23.7% and 24.0% in FY18 to 39.3% and 38.1% in FY19, respectively. Its net margin for FY19 stood at 22.7%, better than the industry median of 16.7%, which implies decent fundamentals for the company. Its ROE for FY19 stood at 79.6%, better than the industry median of 13.2%, which implies company generated a better return for its shareholders. Its current ratio for FY19 stood at 1.62x, better than the industry median of 1.21x, indicating a better liquidity position for the company. Its return on invested capital for FY19 stood at 52.9%, as compared to 4.8% in the previous financial year.


Key Metrics (Source: Thomson Reuters)

Key Risks: The company is susceptible to multiple risks such as operating risks (weather conditions, machinery failure, critical infrastructure failure or natural disasters), market risks (commodity prices and foreign currency markets), geological risks (risks associated with resource and reserve estimation), regulatory and land access risk (state and federal laws and regulations regarding mining, environmental protection, land access, landholder compensation and rehabilitation and native title), climate change risks, etc.

What to expect: As per the release, the group met production guidance for FY19 with 2.390 Mt, which represents an increase of 112% over 1.128 Mt in FY18. FOB costs are expected to increase by around $3.00/t tonne per point of strip ratio at Isaac Plains East as the mining horizon gets deeper. During the first half of FY19, the company secured an additional long-term port capacity through Dalrymple Bay Coal  Terminal (DBCT), which is now providing further certainty to enable the company to consider various options to fill the coal handling and processing plant (CHPP) to its nameplate capacity of 3.5Mtpa Run-of-Mine (ROM). Moreover, the company’s tenure across two separate take or pay contracts of 5 and 10 years gives it a flexibility to scale up and down production through the cost-effective structure to meet market conditions and manage the transition to Isaac Downs once environmental approvals are achieved.

The group is expected to continue to pursue high-value coal sales opportunities and has taken advantage of the planned increased production and coal quality from Isaac Plains East to expand its customer base along with meeting its existing customer’s requirements.
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology 1: Price to Earnings (PE) Multiple Approach (NTM):


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

Valuation Methodology 2: EV/Sales Multiple Approach (NTM):
 

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

Valuation Methodology 3: EV/EBITDA Multiple Approach (NTM):

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: SMR’s stock generated a positive YTD return of 22.55%, while in the span of one year, it has generated a return of 25.00%. The company delivered decent top-line and bottom-line performance for FY19, where the total revenue and profit increased by 93.70% and +1435%, respectively, on previous year. The decent profitability margins, liquidity position and improving metallurgical coal outlook are expected to help the company in delivering a sustainable return for shareholders in the coming year. Currently, the stock is trading above the average of 52-week high and low levels of $1.550 and $0.810, respectively. Looking at the business prospects over the long-term, we have valued the stock using three relative valuation methods, i.e., Price to Earnings (PE), Enterprise Value to Sales and Enterprise Value to EBITDA multiples, and arrived at a target price of high single-digit to low double-digit growth (in % term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$1.245, down 0.4% as on 09 October 2019.
 

 
 SMR Daily Technical Chart (Source: Thomson Reuters)

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