EUR 850.00 For Business Accounts Only

Morningstar | No-Moat Beach Beats 1H Expectations and Ups Guidance. No Change to AUD 1.80 FVE.

We make no change to our AUD 1.80 per share fair value estimate. Beach reported a 114% increase in underlying first-half fiscal 2019 NPAT to AUD 199 million. That substantial jump reflects a full half’s Lattice Energy contribution and higher oil prices. We exclude AUD 88 million noncash gain from Lattice contract liability unwind, which Beach included in its underlying earnings estimate. Regardless, the first-half result was creditably 7.5% ahead of our AUD 185 million forecast, reflecting better than anticipated cost performance. Cost discipline has been a focus with extraction of AUD 56 million in synergies from Lattice to date. Attention is now on reducing direct controllable operating expenses, including optimisation of maintenance activity and synergies with other basin operators in supply chain and logistics.

Beach has increased its fiscal 2019 EBITDA guidance by approximately 20% to AUD 1.25-1.35 billion. However, this includes approximately AUD 110 million of Lattice contract unwind, and the underlying improvement on our measure is less at approximately AUD 90 million or 8% to AUD 1.14-1.24 billion. We upgrade our fiscal 2019 EBITDA forecast to AUD 1.19 billion, at the midrange of guidance after adjusting for the contract unwinds. Our fiscal 2019 NPAT consequently increases by 35% to AUD 420 million or AUD 0.18 per share. However, our fiscal 2020 EPS forecast is unchanged at AUD 0.125, lower than fiscal 2019 chiefly on a lesser assumed oil price. Spot Brent crude currently sits near our unchanged USD 60 per barrel midcycle forecast, down 25% from the USD 80 levels prevailing around November.

Other long-term assumptions are unchanged, including five-year forecast cumulative free cash flow of AUD 2.9 billion to fiscal 2023. This is marginally ahead of Beach’s greater than AUD 2.6 billion target. We assume 4.8% five-year EBITDA CAGR to AUD 748 million by fiscal 2023. Our fair value estimate equates to a little changed 2023 EV/EBITDA exit of 4.5.

That multiple is suitably lower than larger peer Santos’ 6.9, for example, in keeping with Beach’s lesser field life. Beach shares have weakened from October AUD 2.20 highs and at around AUD 1.80 are fairly valued.

First-half fiscal 2019 net operating cash flow tripled to a better than expected AUD 440 million leaving group net debt at AUD 317 million, half December 2018 levels. Net debt/equity is now just 15% and Beach is targeting a debt-free status upon completion of the AUD 344 million Otway part-sale in March 2019. This is a creditable outcome coming more than two years ahead of the original target date post the AUD 1.6 billion Lattice acquisition. The debt free status is commendable. But Beach’s long-term target net gearing range is 15%–25%, providing balance sheet flexibility to further grow by development or acquisition, or increase shareholder returns. The company declared an as expected interim AUD 1.0 cent dividend on a paltry 11% payout ratio. Beach has had payout ratios up to 40% in the past, and on this basis, the yield might improve to nearer 3.0% than the current 1.1%. This is still not earthshattering but mere payment would speak to management confidence in the business.

We continue to sit at a low-end 30 mmboe production target by fiscal 2023, still preferring greater clarity on contributing projects before crediting Beach’s full 36 mmboe. That said, Beach is beginning to fill in the gaps, having secured the La Bella gas field in the Otway Basin, aligned exploration interests with Santos in the Bonaparte Basin, and secured a rig with joint venture partner BP for the Ironbark prospect in the Carnarvon Basin. La Bella is an undeveloped gas discovery within potential tie-back distance to Beach’s existing Otway infrastructure. Alignment with Santos in the Carnarvon sets a clearer path to development, perhaps via Darwin LNG. And Ironbark is a potential high-impact gas resource only 30 km north of Woodside’s North West Shelf project with drilling slated for 2020. We intend looking at these in increased detail soon.