Why it's worth waiting out Whitehaven Coal's 79% profit plunge

Being an Australian coal miner isn’t easy – Weather conditions have been unpredictable, government royalties keep climbing and prices for the commodity have tumbled from their FY22-23 peaks.

Whitehaven Coal (ASX: WHC) saw a significant 79% decline in first-half net profit after tax, driven by a sharp decrease in average realised coal prices from $552 to $220 a tonne. While the result was largely in line with analyst expectations, the stock is down around 5% in afternoon trade.

Perhaps the shock value of the earnings drop is prompting investors to hit the sell button.

To understand more about the coal complex, I spoke to Glenmore Asset Management’s Robert Gregory, who broke down the latest set of results as well as the significance of Whitehaven’s recent acquisition of the Daunia and Blackwater mines.

Key Financial Results

The below numbers refer to first-half FY24 results and comparisons against the prior period.

• Revenue down 58% to $1.59 billion ($1.62 billion consensus estimate)
• Underlying EBITDA down 77% to $622.8 million
• Underlying net profit after tax down 79% of $372.3 million
• Cash generated from operations of $523.2 million
• Unit cost per tonne up 16% to $111
• Net cash down 43% to $1.5 billion,
• Interim dividend of 7 cents per share, fully franked and payable 8 March 2024
• For more financial data on Whitehaven, head to Market Index.

FY24 Guidance and Outlook

• Managed run-of-mine coal production guidance of 18.7 to 20.7 million tonnes, tracking within the guidance
• Completion of Daunia and Blackwater mines will continue to be a key focus in the second half of FY24
• During the deferred payment period for the Daunia and Blackwater acquisition, Whitehaven expects to maintain franked dividends within the targeted payout ratio of 20-50% of NPAT
• Cash flows from the acquired business will be allocated to retiring vendor finance and share buy-back will remain paused

1. In one sentence, what was the key takeaway from this result?

The BMA acquisition remains on track and is scheduled to close in early April. That’s the main story and takeaway from the result.

2. Were there any major surprises in the result that you think investors should be aware of?

No, not really. The Maules Creek Mine continues to perform well while the Narrabri Mine is experiencing some issues. But once the BMA assets come under the umbrella, they’re going to dominate earnings.

Perhaps the 7-cent dividend underwhelmed some investors. But given the large funding requirements for the BMA acquisition, it made sense to reduce the dividend.

3. Would you buy, hold or sell this stock on the back of the result?

Rating: BUY

Whitehaven will experience a significant uplift in earnings from the BMA acquisitions over the medium term. The only thing for investors to be weary of is weak coking and thermal coal prices. They’re very subdued at the moment. This means the consensus for FY25 earnings may need to be revised lower.

The main attraction is the earnings over the medium term (FY26 onwards) when you get earnings from the new mines plus debt reduction.

What’s your outlook on this stock and the sector over the year ahead?

The outlook for Whitehaven is positive. I think the stock price hasn’t fully responded to the positivity of the acquisition. There will be a lot of very strong free cash flow generation over the medium term.

The increased weighting to coking coal versus thermal coal should be a positive for the stock price. But the main thing to be aware of is the current soft coal price environment.

However, buying resource stocks during periods when the underlying commodity price is weak is often a good starting point. So I wouldn’t be too concerned about that issue.

As for the sector, there’s very little new supply being brought online and coal demand continues to be fairly resilient. I think there’s a reasonably positive backdrop for the broader sector.

Are there any risks to this company and the sector that investors should be aware of?

The main risk is a period of prolonged weak coal prices, say for the next two or so years, whilst Whitehaven still has some deferred acquisition payments to make. That is something that investors need to monitor over the next 12-18 months.

Likewise for sector risks, a continued period of weak coal prices. The Chinese economy is also relatively soft at the moment.

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 about the market in general?

Rating: 2

I focus more on the small-to-mid cap part of the ASX. For that part of the market, I’d give it a two. I think it’s still pretty cheap. There are so many stocks in that part of the market that have materially underperformed large caps over the past few years. I’m excited simply because we now have a period where bond yields have started to flatten, together with the cessation of interest rate hikes and economic backdrop, it’s quite positive for a lot of really good businesses in the small-to-mid cap part of the market.