New Hope Corporation: 1H22 result preview - 2022 dividend upside

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

10 March 2022, 8:00 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• Maintaining stable production, containing costs and the forward capital structure (liquidity vs returns) will be the focus at New Hope Corporation's (ASX:NHC) 1H result on March 22.
• We forecast 36cps of FY22 dividends (+12% yield) alongside the accumulation of strong net cash. Current coal pricing infers strong upside to our base forecasts.
• Our base case valuation adjusts to (login to view) and our bull case adjusts to (login to view) on energy prices materially higher than prior forecasts.
• NHC remains an ADD with a forecast 12-month total return ~19%, but spot coal prices look toppy and tactically we prefer to watch for a cheaper entry point.

1H22 result preview, March 22

NHC has reported (unaudited) underlying 1H22 EBITDA of ~$552m, a substantial record (next best 1H19: $285m) driven by unprecedented coal prices.

With coal prices the overwhelming driver, we detail our physical market feedback and our caution on +US$400t spot thermal prices on page 5.

Key drivers and focus points

Bengalla drivers

Recent production has been resilient, but we do anticipate a step-up in costs (added capacity, weather/labour disruption). Assuming a 7-week lag on Index linked sales, and various JPU/Off-spec exposure/ discounts, 1H EBITDA potentially implies price realisations below Bengalla’s recent average of 85-95% per segment reporting.

We’ll look for detail on coal trading, JPU exposure, opportunistic spot sales and FX management as possible explanations.

NHC’s updated capital structure to balance liquidity, M&A optionality and returns will be in focus. We expect independent producers to hold net cash through the price cycle (A$100m minimum) but think most including NHC will retain more for acquisition firepower/ flexibility (BMA assets?) and to assist with debt re-financing (NHC’s Secured loan facility due Nov-23).

Dividend outlook

We forecast 1H22 net cash of +$250m (FY21: $73m net debt) rising to +$680m by end-FY22, pre any dividends. If NHC targets net cash of say ~$300m by end FY22, then this infers $380m or 46cps may be available for returns, although catch-up capex at Bengalla and Bridgeport could trim this.

We think our 1H:2H dividend forecasts of 17:19cps look prudent pending further clarity.

Bridgeport exit?

We don’t think conditions to potentially divest Bridgeport via sale or spin-off can get much better. We value this business at ~$49m (~6cps).

Acland 3

Positive political pressure on full State Government approvals is building post the positive (conditional) Land Court recommendation. We value Acland 3 (un-risked) at $437m (53cps).

Forecast and valuation update

~60-110% upgrades to FY22-24 EBITDA based on rolling coal price upgrades (FY23F NEWC ~US$150/t), and including 1H actuals and adjustments for higher costs (FOR, royalties).

Our DCF based valuation revises to (login to view), and now includes value for Bridgeport (unrisked) and Acland 3 (30% risked). Our equivalent valuation under the bullish pricing scenario shown on page 5 is (login to view).

Investment view

NHC offers ~7% capital upside to our base case valuation but with clear upside (24% to bull-case) linked to spot coal prices trading significantly above both our base and bullish pricing scenarios detailed page 4.

Spot thermal prices near US$400/t look vulnerable to a pullback to us, which would likely weigh directionally on the NHC share price. However, we expect strong energy prices to persist in 2022, and prefer to watch for price desolations to buy on weakness.

Price catalysts

Directional NEWC price moves, persistently higher coal prices above forecasts, potential M&A, potential Acland 3 approval (less likely in our view).

Risks

Production disruption from a single key asset, commodity price and FX volatility.

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