Company Overview: Whitehaven Coal Limited (ASX: WHC) is a leading Australian producer of premium quality coal. The company has an extensive sales network that ensures reliable coal supplies to customers across Asia. The company operates four mines (three open-cut and one large underground mine) in the Gunnedah Coal Basin of New South Wales (NSW). For producing high-quality coal, the company uses open-cut mining methods at Maules Creek, Tarrawonga, and Werris Creek and underground mining methods at Narrabri.

WHC Details

Long-term Outlook Supported by the Recovery in Coal Market: Whitehaven Coal Limited (ASX: WHC) is mainly involved in producing high-quality metallurgical and thermal coal. WHC operates two high-quality, near-term development assets - Vickery, near Gunnedah, and Winchester South, in Queensland’s Bowen Basin. As on 21 April 2021, the company’s market capitalisation stood at ~$1.49 billion. Despite the challenging environment caused by the COVID-19 pandemic, WHC has continued to expand its business, geared towards increased production. WHC’s development projects, Vickery and Winchester South are helping the company in further diversifying its product mix, with a greater weighting towards metallurgical coal low in impurities. Lately, the company’s financial results have been impacted by the low coal prices; however, in the past few months, WHC has witnessed a decent rebound in the prices and expects the outlook for coal markets to further improve in the future, supported by increased economic activity and supply constraints. From 2016 to 2020, the company’s revenue and NPAT have increased at a CAGR of 10.27% and 9.99%, respectively.

5-Year Financials Snapshot (Source: Company Reports)

Looking ahead, the company is focused on cautiously advancing its three development projects - Narrabri underground mine stage 3 extension project, Vickery extension project, and Winchester South metallurgical coal project. These projects are expected to expand WHC’s managed ROM production in the next 10 years. Further, the company will maintain its focus on improving its operational performance to drive improved productivity and to reduce costs. WHC is also focused on retiring debt against the backdrop of the improving price environment.

H1FY21 Result Highlights: During the first half of FY21, the company witnessed a significant contraction in coal prices which impacted its earnings for the period. EBITDA for H1FY21 stood at $37.2 million, down by 79% on pcp, reflecting a lower average achieved coal price. Cash generated from operations stood at $54.9 million in H1FY21. Equity ROM coal production for H1FY21 stood at 7.7Mt, up by 28% on pcp. Equity coal sales, including purchased coal, were 8.7Mt in H1FY21, up 3% on pcp, reflecting the underlying increase in ROM coal production, partially offset by the impact of NCIG shiploader outage on sales.

H1FY21 Results Highlights (Source: Company Reports)

Decent Rise in ROM Production in Q3FY21: For the quarter ending 31 March 2021, WHC reported managed run-of-mine (ROM) production of 5.5Mt, up 12% on the previous corresponding period (pcp). The managed saleable coal production for the quarter stood at 4.3Mt, up 6% on pcp. Despite the impact of the March rain events on production, the company saw consistent ROM production from its largest mine Maules Creek. Due to increased economic activity and supply constraints, the coal prices have improved during the quarter.

Q3FY21 Whitehaven Managed Totals (Source: Company Reports)

FY20 Result Highlights: Despite facing drought, bushfires, and COVID-19 pandemic during FY20, WHC achieved its revised production and sales guidance, with managed coal production of 20.6 million tonnes and managed coal sales, excluding purchased coal, of 17.5 million tonnes. For FY20, the company reported total revenue of $1,721.6 million and net profit after tax before significant items of $30.0 million. The company’s FY20 results were impacted by the softening of gC Newcastle thermal prices and the impact on run of mine (ROM) production of previously reported labour shortages and dust events at Maules Creek, and the scheduled eight-week Narrabri mine longwall move.

ROM Production and Sales (Source: Company Reports)

Key Metrics: Gross margin and EBITDA margin for FY20 stood at 39.7% and 46.5%, respectively. Current ratio for FY20 stood at 1.39x, higher than 1.25x in FY19, demonstrating that the company has improved its ability to pay short-term obligations. Debt to equity multiple stood at 0.32x in FY20, lower than the industry median of 0.46x.

Past 5-year Financial Performance for Year Ending 30 June 2020

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 37.25% of the total shareholding, while the top four constitutes the maximum holding. Lazard Asset Management Pacific Company and Prudential Assurance Co., Ltd. are holding a maximum stake in the company at 8.00% and 5.38%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Rise in Total Coal Reserves and Resources: On 16 December 2020, WHC released its maiden Reserves Statement for the Winchester South Project metallurgical coal mine, wherein it reported that Project JORC Resource is upgraded to 1,100Mt from 530Mt, increasing the total Coal Resources by 12% since August 2020. Moreover, the company notified regarding a maiden JORC Reserves of 350Mt that has increased the Total Whitehaven Coal Limited Coal Reserves by 26% since August 2020.

Key Risk: The company’s financial performance may get impacted by general economic activities, changes in industrial production levels, changes in foreign exchange rates, and changes in coal demand. The company is exposed to the risk associated with the changes in seaborne coal supply, changes in international freight rates and the cost of substitutes for coal. Further, the company is also exposed to operational risk, geology risk, and infrastructure risk. The company is also exposed to the risks related to weather and climate change events like floods, as it could disrupt workforce movements and product haulage. Moreover, weather-related port restrictions could also impact vessel movements at the ports.

Coal Market Outlook: As a result of supply curtailments and increased energy demand in Asia, the Seaborne thermal coal markets have witnessed improvement over the past few months. WHC has been observing a strong rebound in coal pricing. Hence, it is now increasingly optimistic that underlying market dynamics are supportive of continued improvement. WHC is optimistic that the metallurgical coal sales volumes in 2021 will return to pre-COVID-19 levels.

FY21 Guidance: Due to the geological challenges at the company’s Narrabri underground mine, and associated maintenance downtime and loss of production, WHC has slightly reduced its ROM production, managed coal sales and unit cost guidance for FY21. The company now expects its FY21 managed ROM coal production to be in the range of 20.6 – 21.4Mt. Further, the company expects its managed coal sales to be between 17.8 – 18.3Mt. Considering the rebalance of coal market, improved price environment, and ongoing cost reduction initiatives, the company seems well placed to achieve a stronger outcome in the second half of FY21.

FY21 Revised Guidance (Source: Company Reports)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of WHC has corrected by 18% in the past three months and is trading lower than the average 52-weeks’ price level band of $0.830 - $1.990, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$1.249 and a resistance of ~$1.85. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peer median EV/EBITDA (NTM trading multiple), considering the continued impact from COVID-scenario, softer results in H1FY21 and tightening of FY21 guidance. We have taken peers like Yancoal Australia Ltd (ASX: YAL), Coronado Global Resources Inc (ASX: CRN), New Hope Corporation Ltd (ASX: NHC), etc. Considering the company’s high-quality development assets, ongoing cost-reduction initiatives, decent performance in Q3FY21, improved price environment of coal, modest long-term outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.365, down by 5.863% on 21 April 2021.

WHC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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