Hot Coals

Ord Minnett has factored in marginally lower FY17 production into its model for Whitehaven Coal following the company’s production and sales update, with the main issue being difficult ground conditions at its Narrabri mine.


Despite this, we expect Whitehaven Coal to generate around $726 million of free cash flow in FY17 (a yield of 26%) with net debt falling to $137 million by the end of June. This will leave expected gearing at just 4% for FY17.


Valuation metrics continue to look compelling – Whitehaven Coal sports an enterprise value to operating earnings multiple of 4.0 times and a price to net present value ratio of 0.87 times. This has led us to reiterate our Accumulate recommendation, although we trim our target price to $3.20 from $3.30.


We also note that spot thermal coal at circa US$82 a tonne continues to trade above our 2017 price forecast of US$69 a tonne, presenting upside potential to our estimates (some two-thirds of FY17 revenue is from thermal coal). In addition, the March 2017 semi-soft coking coal settlement price of US$171 a tonne is above our 2017 forecast of US$133 a tonnes.


Overall, we believe consensus earnings estimates for Whitehaven Coal (and the balance sheetposition) will continue to improve from an ongoing upgrade cycle. Our FY17 net profit forecast is $479 million, about 24% above Bloomberg consensus of $386 million.


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