EUR 850.00 For Business Accounts Only

Morningstar | Whitehaven Somewhat Undervalued with the Near-Term Outlook for Dividends Positive

Whitehaven Coal shares have recovered somewhat in the past week but there’s still reasonable value on offer. The shares trade around AUD 3.80, about a 14% discount to our unchanged AUD 4.40 per share fair value estimate for the no-moat-rated firm. The shares have sold off materially since October last year, falling one third from highs of AUD 5.75. Production issues, particularly in the third quarter of fiscal 2019, coupled with the declining thermal coal price are the key reasons the shares are down.

There’s some concern the firm may enter a period of elevated capital expenditure but here we see potential for regulatory delays. From fiscal 2019 levels, Whitehaven wants to roughly double its share of coal production to about 32 million tonnes a year by fiscal 2027 via the Vickery and Winchester South developments. Potential approval delays are not necessarily bad and support near-term shareholder returns. The financial position is strong with just AUD 244 million net debt at end 2018 and forecast free cash flow of AUD 470 million in fiscal 2019. Strong cash flow is a function of favourable coal prices last financial year. Much of that cash is likely to be returned to shareholders.

Full-year dividends should total AUD 0.40 per share assuming a repeat of the half-year’s AUD 0.20 per share payout. The yield is likely to be attractive for the next year or two, but we caution that Whitehaven is only exposed to coal and will eventually enter a period of elevated capital expenditure. Cyclical coal prices and intermittently high capital expenditure needs mean dividend payments are likely to vary considerably from peak to trough. Coal prices and the company’s ability to efficiently build new mines will be the key drivers of the share price in the near- and long term.

Whitehaven wants regulatory approval for the 8 million tonne a year Vickery mine by end 2019, followed by a two-year construction. Production is expected to ramp up over several years. Winchester South, declared a coordinated project by the Queensland Government, appears to have some support. But as New Hope has shown with Acland, gaining approvals can be a drawn-out affair in Queensland. First, Winchester South production is expected in about five years, with output to subsequently ramp up to 8 million tonnes a year a few years later. We value the two projects at cost and expect them to return close to Whitehaven’s cost of capital. The key variables are risks to approvals, with delays typical. But if Whitehaven sells shares of these assets at a premium, most likely to would-be customers, there is upside to the valuation.