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New Hope For More Dividends

Australia | Mar 24 2022


Following first half results for New Hope, brokers focused not only on the surprise special dividend but also on prospects for future distributions.

-New Hope’s first half dividend was 76% above the consensus estimate
-Realised thermal coal prices rose materially and free cash flow exceeded expectations
-Management expects more regular special dividends

By Mark Woodruff

As first half results for New Hope Corp ((NHC)) were largely pre-released, brokers concentrated on the 76% dividend beat versus the consensus forecast, as well as prospects for further distributions.

The company produces thermal coal from its 80%-owned Bengalla open cut mine in the Hunter Valley in NSW and its 100%-owned New Acland mine in Southeast Queensland.

Thermal coal prices have increased materially from US$50/t in late 2020 to over US$240/t currently and over this period the share price has rallied from around $1.40 to just above $3.20.

Macquarie points out the current share price is only pricing-in a thermal coal price of US$120/t. While this suggests a looming correction in thermal coal prices, there’s considered to be upside risk from prices remaining higher for longer than consensus is anticipating.

First half earnings of $554m and profit of $330m were within 1% of the broker’s forecasts, while revenue of $1.025bn exceeded expectation by 3%. The revenue is largely derived from Bengalla ($909m) and New Acland which generated $100m, despite being on care and maintenance since December 2021, pending approval (?) for a Stage 3 mining lease.

A highlight was stronger-than-expected operating cash flow and lower capital expenditure which resulted in free cash flow of $439m, which was 26% above Macquarie’s expectation.

This cash flow outcome, along with an extraordinarily strong second half cash flow outlook, according to Morgans, led to the surprise 13cps fully franked special dividend. The 17cps fully franked ordinary dividend was considered in-line.

Realised prices

New Hope achieved an average selling price of US$193/t in the first half compared to US$78/t a year earlier.

Macquarie points out the company currently sells 75% of its coal at index-linked prices. However, the balance is dictated by domestic fixed-price contracts or is linked to the Japanese reference price. As a result of these arrangements, realised prices will be materially lower than spot-price averages.

While the broker maintains its Outperform rating, its target price falls by -10% to $4.50. Nonetheless, this still exceeds by $1.00 the next highest target price in the FNArena database.

Capital Management generally

Morgans expects New Hope will retain more cash for acquisition firepower/flexibility and to assist with debt re-financing, as a secured loan facility is due in November 2023. It’s felt the company is in no rush to pursue acquisitions at this stage of the cycle though purchases of related industry services and/or infrastructure may be contemplated.

Management aims to distribute special dividends ‘on a more regular basis”, which leads Citi to conclude dividend returns may be preferred over M&A in the short term.

Dividends specifically

Citi notes the aggregate dividend of 30cps for the first half represents an 83% payout ratio. Assuming the ratio stays around that level, the broker’s forecast dividend yield for FY22 and FY23 is 22% and 17%, respectively.

While Morgans estimates 27cps will be available as a second half dividend, there is upside potential should coal prices exceed current forecasts. The broker raises its target price to $3.40 from $3.05 and retains its Add rating.

Meanwhile, even after putting aside $600m for M&A and development costs, Credit Suisse forecasts FY22-24 dividend yields of 21%, 14% and 12%, respectively. These yields are calculated after allowing for an additional 15% earnings (EBITDA) payout, to be distributed as a special dividend.

The broker maintains an Outperform rating and increases its target price to $3.50 from $3.00.

Share price upside

Given the quasi-embargo on Russian products, and as Indonesian sub-bituminous coal is not a direct substitute, Credit Suisse feels a premium price north of US$200/t may be in prospect for a number of years.

Applying the current spot price of US$240/t, Macquarie arrives at a net asset value for New Hope of $10.9bn or $13.13/share.

Given very attractive sector returns, Morgans sees the potential for a wider range of investors and points to the role of thermal coal in bolstering energy security amid current volatility.

Overall, FNArena’s database has four broker ratings each with a Buy recommendation and a consensus target price of $3.57, which suggests 10.3% upside to the last share price, dividends not included.

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