Is ASX: WHC anywhere close to a buy bet?

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Australian Economy, Macro Economics

Whitehaven Coal’s Chief Mr. Flynn pointed it out to the International energy agency, that the thermal coal demand which show cases need in south East Asia is expected to be increasing from 187 million tons to 452 million tons by 2040. The increase in the thermal core export shipped out of Australia in the past year is more than double the 200 million tons, when exports hit a record $23 billion. Australia is a proximate source of high quality coal to that demand center, and one of the reasons of low quality coal was worse emission outcomes. The scenario is still questionable given the shift to renewables and there is some risk looming over the metallurgical coal prices that are expected to drop in couple of years from now.

Given the backdrop, Whitehaven Coal Limited (ASX: WHC) is an energy sector stock which is into exploration and coal mining; and has traded at a market price of $5.810 which is near its 52-week high, as at July 09, 2018. The stock has seen a daily price change of -$0.080 or -1.358% on said date. The stock otherwise has risen by 111% over the past 12 months and was seen trading at $ 5.85 as at July 10, 2018, market open. The annual dividend yield of the stock is 3.27% and the most recent dividend declaration was of 13 cents. The P/E ratio of 11.330 is well compared to its peers and the EPS is of AUD 0.513.

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ASX: WHC Daily Price Chart as at July 09, 2018, Source: Thomson Reuters

The company is the largest producer of high quality coal from the Gunnedah Basin i.e. high Calorific Value (CV) and low ash and Sulphur. Whitehaven recorded half year net profit of $257.2 million, up 63%, and EBITDA of $460.6 million, which is up by 42% on the prior corresponding period. An interim dividend of $0.13 per share declared recently.

The recent purchase of the Winchester South metallurgical coal project in Queensland provides another growth opportunity beyond Vickery project, while managed saleable coal production is forecast to grow strongly from the startup of the Vickery project. In Australia, in recent years Whitehaven has developed the only new large-scale mines – Narrabri and Maules Creek. Modest increase in exports from Australia – 203Mt in 2017 to 213Mt to 2020 is being led by Brownfield expansions from several mines. Existing operating mines and limited new developments are the focus in the recent M&A activity.

Three of the largest coal users – China, Japan and India will continue to use coal for decades to come as they install new HELE technology (high efficiency, low emission). Many regions are diversifying the energy sources and aim to provide cheap and reliable electricity for their growing populations, however, the countries that do not have indigenous sources of energy are still committing to coal.

According to the demand for both metallurgical and thermal coal, which is expected to continue growing to 2040 and 2035, respectively, coal companies may be the beneficiaries for some more time. The demand growth in Asia is likely to exceed the developed economies in Europe and United States for which the demand is declining, also the demand for high CV clean coal like the one produced by Whitehaven may rise as more HELE power stations are deployed in the region. Many countries including India, Japan and China have included coal use in their respective Nationally determined contributions underpinning coal demand, however, new mines are difficult to develop and finance related issues are cropping up in many jurisdictions. Given the whole scenario and higher trading levels for WHC, it can be watched out while the risks in the coal sector do prevail.


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