New Hope Corporation: Dividend harvest to build

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

23 March 2022, 12:30 PM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• Among New Hope Corporation's (ASX:NHC) record 1H22 financials we are impressed with Bengalla’s strong volume outlook, helping to contain costs.
• The 13cps special dividend was a surprise, justified by higher than expected 1H cash flow and an extraordinarily strong 2H cashflow outlook.
• Base case valuation adjusts to (login to view). Bull case adjusts to (login to view).
• We forecast 50cps of FY22 dividends (+15% yield) alongside the accumulation of strong net cash. Current coal pricing infers strong upside to our base forecasts.
• Maintain Add with a forecast 12-month total return of ~22%.

1H22 result snapshot

Revenue ($1.03bn) was 4% ahead of our forecasts and EBITDA ($554m) was a substantial record (next best 1H19: $285m). Free cash flow of $435m was ~$80m better than expected helped by lower cash tax and capex.

The 17cps ordinary dividend was in-line, but the 13cps special (both fully franked) strongly surprised.

Key takeaways

Bengalla resilience: NHC’s life-of-mine re-modelling supports a ROM production target closer to 13.5Mt (100%) versus the current 12.5Mt run-rate and well below the permitted 15Mtpa.

Additional trucking capacity to be added in the 2H will help offset recent challenges (weather) and build toward this target, and the incremental cost will be dwarfed by current achieved margins (1H: A$115/t). 1H FOR/FOB Cost reductions looked impressive but looked predominantly volume driven. 

Realisations/ trade coal: Notional 1H Bengalla price realisations vs a lagged NEWC price sat at 85% in-line with the mid-term average. However, the P&L includes traded coal ($129m outlay, volume potentially ~0.5Mt) which distorts this calculation.

We sense more price opportunism in NHC’s trading strategy, alongside product quality/ margin optimisation goals.

Capital structure: We expect the independents to hold net cash through the cycle (A$100m minimum) but think NHC will retain more for acquisition firepower/ flexibility (BMA assets?) and to assist with debt re-financing (secured loan facility due Nov-23).

NHC looks in no rush to pursue acquisitions at this stage of the cycle, but we understand it favours its strengths in coal, and may consider related industry services/ infrastructure.

Dividend outlook: We forecast FY22 net cash to rise to ~$425m (1H22: $324m). This treats the convertible notes as debt, is post all 1H dividend payments, includes higher 2H capex, includes $100m of catch-up cash-tax, but is pre any 2H dividend.

If NHC targets ~$200m of net cash post end FY22, then this infers $225m or 27cps is available as a 2H dividend. Clearly there is upside potential to our forecast.

Forecast and valuation update

~13-28% upgrades to FY22-24 EBITDA driven by further coal price upgrades (FY23F NEWC ~US$163/t), inclusion of 1H actuals and adjustments for higher costs, 2H cash tax and capex.

DCF based valuation revises to (login to view) and includes value for Bridgeport (unrisked) and Acland 3 (15% 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, but with clear upside potential (23%) to our bull-case, and to our dividend forecasts (15% yield) linked to coal prices exceeding the pricing scenarios detailed on page 4.

We expect strong thermal coal prices to persist in 2022 with potential to ratchet market valuations on all coal stocks higher.

We also see potential for a wider range of investors to take notice of current sector returns, and thermal coal’s role in bolstering energy security amid current volatility.

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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