Australia | Mar 24 2021
This story features NEW HOPE CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: NHC
New Hope Corp is facing the prospect of putting New Acland on the shelf while strengthening coal prices have boosted cash flow and a resumption of dividends
-Surging coal prices underpinning FY21 outlook
-M&A now features in the company's plans
-New Acland expansion appearing increasingly unlikely
By Eva Brocklehurst
Coal prices have moved in a favourable direction for New Hope Corp ((NHC)) as it battles a declining production profile at New Acland and more court proceedings. The company's key operations, Bengalla in NSW, could be affected by adverse weather in the third quarter, although the company has stated it is yet to experience any major disruptions.
As weather and legal issues create headaches for the company, Macquarie is cautious about the outlook, even as thermal coal prices surge, although acknowledges there is earnings upside currently in a spot price scenario.
Credit Suisse points out recent weather events affecting the coal hub at Newcastle are only likely to tighten the coal market further, underpinning New Hope's pricing potential, although the legal wrangling creates uncertainty and New Acland in Queensland is now somewhat of a "value option".
Lower costs helped first half results which translated to free cash flow that was stronger than expected. The earlier-than-expected resumption of a 4c interim dividend was the best news for most brokers. In hindsight, Credit Suisse points out this was really no surprise, given where the coal price has gone over the past few months, and lifts earnings estimates for FY21 by 20% as a result.
The broker considers the stock fairly priced but with upgrades likely and more dividends to come acknowledges the upside risk is now more visible. Thermal coal prices have now exceeded US$100/t which compares with spot pricing closer to US$50/t just six months ago.
As a result, Goldman Sachs considers the business is well-positioned to capitalise on price recovery as is one of the lowest cost producers, pricing in a long-run coal price of US$60/t. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, retains a Buy rating and $1.90 target believing the stock is undervalued, even with when removing New Acland from consideration.
Goldman Sachs continues to envisage Bengalla will deliver resilient margins, increasing to 51% in the second half of FY21 on the broker's forecasts. Morgans, too, considers cost reductions at Bengalla combined with stronger price realisation underpin valuation.
The broker points out NSW coal producers will suffer from deferral of sales as a result of rain disruptions but the impact on cash flow is likely to be offset by higher prices. Moreover, customer sentiment supporting higher prices is likely to be longer lasting.
The broker highlights New Hope's purchase of its first tranche of Bengalla at the bottom of the last cycle in 2016 and estimates the asset has generated around $1.90bn in operating earnings (EBITDA) since then. Morgans suggests investors can buy Bengalla's base case cash flow and a material discount and receive New Hope's hard asset base and growth options with free.
Management has indicated it has no gearing target and will seek accretive M&A, specifically a producing asset. Morgans believes the appeal of acquisitions has risen with an improving balance sheet and fewer competitors for coal assets. There is also the strategic logic of diversifying operations, product and geographic risk. In this way, the broker suggests some of BHP Group's ((BHP)) non-core assets may fit the bill.
The company has further impaired New Acland assets with an onerous charge of $37.3m on a take-or-pay rail contract. Australia's High Court has upheld an appeal and ordered the New Acland matter to be heard in the Queensland Land Court for a third time.
The company has signalled there is a risk the project will be placed on care and maintenance as it has been unable to secure required approvals and licences for stage 3. The ramping down of New Acland stage 2 caused impairments of -$10.1m in the first half.
Goldman Sachs believes the long delays may now mean the company explores other accretive growth options and envisages an increasing likelihood New Acland will not re-start if it is not in receipt of all permits within the next 12-18 months.
Liquidators have also commenced legal proceedings against New Hope in relation to the Colton project with claims of $174m plus interest and costs. Proceedings are to commence in connection with insolvent trading, asset transfers and breaches of directors duties. Goldman Sachs notes this follows a dispute in 2019 with the liquidators and the WICET port, which was dismissed by the NSW Supreme Court and Court of Appeal.
FNArena's database has three Hold ratings and one Buy (Morgans). The consensus target is $1.46, suggesting 8.3% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 5.2% and 4.6%, respectively.
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