James Gerrish: “The biggest 12-month turnaround I’ve ever seen from a company”

“The best performing ASX 200 stock over the last year,” is how Market Matters’ James Gerrish describes this company. He also calls out its remarkable balance sheet about-face, turning $1 billion of debt into a net cash position of the same size in a year.

This is all the more surprising given it is part of a sector that’s been widely shunned by large swathes of developed market investors – including banks and other institutional funding sources.

Coal has been increasingly on the nose amid the worldwide divestment movement and the shift toward cleaner energy sources. But the reopening of economies as COVID lockdowns and other restrictions were gradually removed saw a rapid recovery in demand. 

Then, Russia’s invasion of Ukraine just over six months ago proved to be the ultimate black swan in accelerating this trend. With the war still raging, disrupted energy supplies in large parts of Europe have seen several countries re-activate dormant coal-fired powerplants.

Eurozone gas prices surged 15% in one day alone earlier this week after Russia took a key pipeline off the grid. German electricity prices have also gone vertical, putting even more pressure on an already struggling consumer.

While the macro backdrop looks strong for now, Whitehaven Coal ASX:WHC – which reported a record $1.95 billion net profit on Thursday – still faces challenges. 

In the following interview, Gerrish discusses what he drew from the earnings announcement, which included a proposed share buyback to distribute some of the proceeds from the extraordinarily high coal prices seen since the end of 2021. He also explains some of the risks he sees for the coal miner over both the short- and long-term and his outlook for the year ahead.

Note: This interview took place on Thursday, 25 August 2022. Shaw and Partners currently holds WHC. 

Key results

• Revenue of $4.92 billion, up 216%
• Underlying NPAT of $2 billion, up from a loss of -$543.9 million in FY21
• Underlying EBITDA of $3.06 billion, up 1,396%
• 40 cents a share final dividend, payable on 16 September.

What were the key takeaways from this result? What surprised you the most?

It was a huge result, there’s no doubt about it. This time, last year Whitehaven delivered EBITDA of $204.5 million, this year they’ve done $3.1 billion – a 15 times increase in earnings over the last 12 months. Obviously, that speaks to the huge coal price tailwind they’ve had. And this time last year, they had nearly a billion dollars [worth] of debt, while they've now got net cash of a billion dollars, and it seems to me there's a lot more to come.

There wasn't a lot of new news coming out of today's announcement, but there was confirmation of the massively supportive trends that have been playing out over the past 12 months. The only surprise the market might be seeing – and management guided to this at the June quarter update, so it shouldn’t be a surprise – was the dividend at 40 cents a share, taking the full year to 48 cents. The market was probably expecting something closer to the 50-cent mark for the second-half dividend.

Next year, dividends are going to be substantially more. We knew management would announce its decision to seek shareholder approval to expand its buyback.

So, wrapping that up, there were three main things from this result:

• earnings are huge, delivering the biggest 12-month turnaround I've ever seen from a company.
• Debt has gone from a concerning level, to now cashing a billion dollars, and
• The company’s going to be a cash cow for the foreseeable future.

What was the market’s reaction to this result? Was this an overreaction, an underreaction or appropriate?

Immediately following the result, the share price was trading almost 6% lower. But given there was not much news in the result – we had a quarterly update from Whitehaven recently - I suspect that's more a case of “buy the rumour and sell on the fact” and probably a bit of disappointment around the dividend. So, I'm not surprised by the selloff in the market.

I think it's an appropriate reaction. In the context of where the share price has been, it’s up 43% over the last three months and 190% over 12 months – the best performing stock in the ASX 200 over the last year. So, having delivered a result that is known by the market, a slight pullback in share price isn't at all surprising.

Would you buy, hold, or sell WHC on the back of these results?

Rating: HOLD

I'll buy at the next $1 pullback, which is something that’s happened three times in the last 14 months. But right now, it’s becoming a very widely owned trade. I think that's why you're seeing a bit of softness in the share price today following the result. It’s almost become a stock that you need to own, or the sector that you need to own, and that concerns me a little in the short term. 

Buying into consensus trades as they make new highs can be a risky proposition. So, we’ll wait for a pullback to buy Whitehaven Coal – I'll hold here at around $7.50 and buy at near $6.50.

What’s your outlook on WHC and its sector over FY23?

It's still positive. If commodity stocks deliver operationally, they will follow the underlying commodity price - so you’ve just got to have a view on coal markets. And in FY 21, WHC has achieved a realised average price of around $96 a tonne, and a realised average of $325 a tonne in FY22. The current pricing is above $400 a tonne, and we're going into a European winter, which is going to bring on fresh demand in a tight market, so I expect prices to remain elevated. And you have a lag between the realisation in prices versus what we’re seeing in the market now. So, even if nothing changes, they've got several quarters where they're going to print a lot of cash because of that lag effect.

Are there any risks to this company and its sector that investors should be aware of given the current market environment?

China is always a risk when you think about commodities, especially for coal.

And I also don't think the world works at $400 a tonne for thermal coal, because higher prices generally incentivise new production to come online. Coal's a little bit different, in terms of the environmental issues that surround it. This means a lack of new financing in the space - no bank wants to lend in this space, and no government wants to permit new mines, for example. 

That’s why the price has been so unbelievably elevated: the normal dynamics for the market aren't playing out because of environmental issues.

Such high prices prompt action from governments to address the issue, one way or another, and I'm not sure how that plays out.

Regulation is another risk. In Queensland, we’ve seen a changed taxation regime around coal, but New South Wales – where Whitehaven operates – hasn’t done that. But to me, that is probably the biggest risk in the near term.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?

Rating: 3

I think the market is probably a little bit on the expensive side of cheap. It's artificially cheap now because you've got huge earnings coming through from the miners. We all know commodity prices are cyclical, but I do think commodity prices will stay higher, for longer.

I'm excited about the market, particularly some sectors. We've seen a huge amount of divergence between things that are doing well and those that aren’t. I think it's a great environment for people who are more active around their positioning.

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