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Morningstar | Whitehaven Coal 1H19 Results Boosted by Rising Coal Prices but Guidance Weak

No-moat Australian coal producer Whitehaven Coal delivered 19% growth in net profit to AUD 306 million for first-half 2019. The rise was driven by buoyant prices for both thermal and metallurgical coal. Net of royalties, Whitehaven realised an average 17% increase in coal prices to AUD 142 per tonne. Revenue increased 11% despite an 11% fall in coal sales volumes, net of purchased coal, versus the first half of fiscal 2018.

Production was soft in the half, primarily due to disruptions at Narrabri, with lower volumes impacting unit costs. Whitehaven will upgrade its longwall equipment at Narrabri in an effort to improve production volumes and consistency. The company will spend an additional AUD 35 million through to fiscal 2020 on the upgrades. The EBITDA margin of 51% was flat compared with a year ago as operating costs increased at a similar rate to prices. However, on a per tonne basis, the margin still expanded by 12% to AUD 73.

Operating cost inflation was high and guidance weak, but we maintain our AUD 3.80 per share fair value estimate. Unit costs rose 21% to AUD 69 per tonne versus a year ago reflecting higher oil prices and transport costs and weaker volumes. The focus on higher-quality coal production helped to realise higher prices, but also comes with additional processing costs.

Whitehaven has increased full-year unit cost guidance to AUD 67 a tonne excluding royalties from AUD 64 previously. This compares with AUD 62 per tonne in fiscal 2018. Whitehaven says structurally increased mining costs account for AUD 4 per tonne of the increase and higher oil and processing costs AUD 3 per tonne. The company expects a further AUD 4 per tonne of costs from short- to medium-term challenges which should moderate over time. The company trimmed its fiscal 2019 salable coal guidance to 21.5 million tonnes to 22.5 million tonnes, a 0.5 million tonnes reduction.

Whitehaven's balance sheet and financial position is strong. Net debt of AUD 244 million is down from AUD 270 million at end June 2018. Annualised net debt/EBITDA was just 0.22. Whitehaven declared an unfranked interim dividend of AUD 15 cents and a special dividend of AUD 5 cents per share, which is a payout ratio of 66%. Some in the market appeared to expect greater returns to shareholders. However, total dividends partly reflect the potential for meaningful capital expenditure should Vickery be approved in 2019. A higher dividend is likely in the second half given the expected higher volumes with a recovery in production at Narrabri. We forecast an approximate 30% sequential increase in second-half salable coal production.