New Hope Corporation: Cash harvest season
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 22 September 2021, 9:00 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
- Abnormals linked to Acland’s ramp-down took some shine off NHC’s otherwise strong FY21 operating results.
- Stronger than expected coal pricing again drives upgrades, with tight physical market dynamics suggesting ongoing upside risk to our coal price deck.
- Base case valuation adjusts to (login to view). Bull case valuation is (login to view).
- We see clear upside to both capital and shareholder returns for NHC, particularly if no M&A/ major investment is executed in the near term.
FY21 result snapshot
Revenue ($1048m) and underlying EBITDA ($367m) were within 1-4% of our forecasts. Op cashflow ($296m) was ~$60m below as we underestimated abnormals linked to Acland’s ramp-down re unused rail capacity ($37m), redundancies/super ($25m), liquidation, growth and M&A expenses, and higher receivables.
Final dividend of 7cps was conservatively below consensus (9cps).
Key takeaways / analysis
Price realisations through FY21 have surprised us to the upside. Washing harder to a lower-ash spec is clearly highly accretive and we infer the marketing strategy is more assertive around spot sales and FX.
NHC’s strategy remains consistent (strong BS, dividend stream, M&A optionality not limited to coal/Aus) but no quantitative guidance was offered. We model higher Bengalla volume in FY22 (no major shuts) at slightly higher costs recognising industry cost pressure and added pre-strip capacity.
We forecast Bengalla to generate A$710m of FY22 EBITDA at cash margins of ~A$90/t or 61%. Risks look skewed to the upside linked to higher index prices above our forecasts and lower sales into JPU pricing. Our forecasts imply a FY22 yield of 11%, but on a higher payout than cited by NHC (~25% of EBITDA), although we do note NHC will charge into a net cash position during 1QFY22.
M&A state of play: We think that the probability of NHC (or anyone else) acquiring Mount Arthur from BHP is now low given lease complexities, its vastly improved profitability and likely abatement in urgency to sell. NHC may pursue other assets, but with Acland 3 still in the background, we think that surplus cashflow will spill-over into higher dividends before NHC’s next major investment unfolds.
Acland 3: The project’s fourth Land Court hearing commences November with recommendations expected in Feb-March. A positive recommendation (then put to the Minister) would be a bonus as we risk the project to zero in our valuation. We value Acland 3 at 43cps on an un-risked basis.
Forecast and valuation update
~40-90% upgrades to FY22-23 EBITDA based on rolling coal price upgrades.
DCF based valuation revises to (login to view) conservatively built predominantly on Bengalla’s cash flows only. Our valuation under a bullish pricing scenario comparable in duration to the 2017-18 period is (login to view).
NHC offers ~23% upside to our base case valuation, with upside linked to persistently higher coal prices above our conservative forecasts.
NHC retains dry powder for acquisitions, where the ability to move quickly/cleanly is an advantage, but where the obvious sector assets (BMC/ Mt Arthur) are looking less likely to transact in the near term.
Persistently higher coal prices above our forecasts, potential M&A, Acland 3 Land Court process (due Mar-Q 22).
Potential M&A does bring risk as well as opportunities depending on funding, structure, value and the motivations of key counterparties.
Production disruption from a single key asset, commodity price and FX volatility
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