New Hope Corporation Limited

NHC Details

NHC to Lay Off 75% Work Force: New Hope Corporation Limited (ASX: NHC) is a diversified energy company with business interests and operations in coal mining, exploration, port operation, oil, agriculture, innovative technologies and investment. The market capitalisation of the company stood at ~$1.01 billion as on 16^th October 2020. Recently, the company notified that it has decided to lay off its around 75% of the workforce at the corporate office by the end of November 2020 via offering voluntary redundancies. As a result of these changes, the company is likely to have a more simplified management structure with most of the executive positions being eliminated. The company took this tough decision due to uncertainty pertaining to the Stage 3 approval for New Acland Mine. The company applied for Stage 3 approvals in 2007 for the very first time; however, since then, NHC has been locked in the process by the anti-coal activist. Previously, the company had also laid off 173 employees and contractors from the mine, head office and the port. NHC believes that Stage 3 is a shovel ready project, which possesses capabilities to provide good long-term jobs for the citizen of Queensland. During FY20, coal production from New Acland stood at 2.8 million tonnes, indicating a fall of 33% on 2019 production. Going forward, the company is likely to maintain its focus on securing all necessary approvals for New Acland Stage 3 in order to ensure continuity of operations and employment for the remaining workforce and contractors.

FY20 Operational and Financial Highlights: For the year ended 31^st July 2020, the company reported a coal production of 11.3 million tonnes, reflecting a rise of 4% over FY19. This was generated by the full-year interest of 80% in Bengalla Joint Venture. The company recorded a profit after income tax of $84 million, down by 69% against FY19 and EBITDA margin for the year stood at 27%. The company’s financial performance was impacted by COVID-19, lower US$ revenues as a result of market index pricing conditions and increased cost of sales as the Acland Mine nears the end of the Stage 2 life.

Key Financials (Source: Company Reports)

Outlook: For FY21, the company is expecting to report total production at record levels, which would be supported by operational improvements. In addition, the company seems to be well-placed to withstand the current global economic downturn and retain its position as one of the leading coal producers of Australia on the back of low cost, quality assets and strong balance sheet.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company closed the year with cash and cash equivalents of $70.3 million as compared to $58.8 million at the end of FY19. Net debt balance at the end of the year stood at $290 million. The stock of NHC has corrected by 27.46% in the past six months and is currently inclined towards its 52-weeks low price. On a technical analysis front, the stock of NHC has a support level of ~$1.08 and a resistance level of ~$1.322. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price, which is offering an upside of lower double-digit (in percentage terms). Therefore, considering decent production in FY20, expected growth in production, decent balance sheet, valuation, long-term outlook, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.185 per share, down by 3.266% on 16^th October 2020. 

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

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