Company Overview: New Hope Corporation Limited (ASX: NHC) is a diversified energy company with operations into coal mining, exploration, oil, agriculture, port operation, innovative technologies and investment. NHC began its operations in 1952 by operating coal mines in the Ipswich region of Queensland. Since then, the company has acquired various mines and projects and has brought in dramatic changes to domestic and export markets. Over the years, the company has maintained its focus on creating synergies and integration efficiencies across all its sites by leveraging off the individual strengths of each operation and where possible, applying those across other sites.

NHC Details

Improvement in Bottom-line and Top-line: New Hope Corporation Limited (ASX: NHC) is a diversified energy company with business interests and operations spanning coal mining, exploration, port operation, oil, agriculture, innovative technologies and investment. The company has three reportable segments, namely Coal mining in Queensland, Coal mining in New South Wales and Other (including coal exploration, oil and gas related exploration, development, processing, production, pastoral operations and administration). The company continues to pursue growth through the development of existing assets and the acquisition of complementary assets. Last year, the company increased its interest in the Bengalla mine from 40% to 80%. As a result of this, Bengalla now forms the largest component of NHC’s asset portfolio. Over the last five years, the company has witnessed significant improvement in its top-line as well as the bottom-line. From 2015 to 2019, the company’s revenue has increased at a CAGR of 26.77%. Over the same period, the company’s bottom-line has improved from a net loss of $21.8 million in 2015 to net profit of $210.65 million in 2019.

Historical Financial Performance (Source: Company Reports)

Currently, the company is focussed on protecting the health and well-being of its team members and minimising the threat of COVID-19 entering the company’s sites. As per the quarterly activities report for the period ended 30 April 2020, the production across sites has not been adversely affected as a result of the pandemic control measures implemented by the company. Currently, the coal demand in Vietnam and Taiwan is strong. Further, the coal demand in China is also recovering with a rise in Chinese industrial activity and power consumption. Looking forward, the company intends to emphasize more on managing its costs and risks across the business. With a solid balance sheet and cashflows and longstanding banking and coal marketing relationships, the company seems well-positioned to meet the growing energy demands of its Asian customers.

FY19 Result Highlights: During the financial year 2019 or FY19, the company produced 10.9 million tonnes of saleable coal, up 21% on the previous year. From New Acland and Jeebropilly, the company produced 4.8 million tonnes of saleable coal.

One of the major highlights of the year was the acquisition of an additional 30% interest in the Bengalla mine, taking the total interest to 80%. The Bengalla Mine (100% basis) produced 9.3 million tonnes of coal in 2019, which is in-line with the prior year. Another significant highlight of the year was the production optimisation from well workovers resulting in increased production. During the year, the company successfully de-risked its exploration portfolio with farm-out of work programme activities.

For the full year, the company reported revenue from operations of $1,306 million, up 21% on the last year. Further, the company reported Profit after tax and non-regular items of $210.7 million, up 41% on FY18, mainly due to the increased contribution from Bengalla. During the year, the company generated a strong cash operating surplus of $509.8 million (before acquisition costs, interest and tax), up 18% on FY18.

Financial Summary (Source: Company Reports)

H1FY20 Results Highlights: For the first half of FY20, the company reported revenue from operations of $618 million, in line with the previous corresponding period (pcp). Over the period, the company produced 6.2 million tonnes of coal, up 33% on the pcp. Bengalla reported the production of 4.3 million tonnes of coal for H1FY20.

For H1FY20, the company reported EBITDA of $213 million and NPAT of $86 million. For the half-year period, the company declared an interim dividend of 6 cents per share. Over the period, the company maintained its focus on strong cost management. As a result, the total costs increased by only 54% relative to the 84% production increase.

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 68.66%. Washington H Soul Pattinson and Company Ltd and Perpetual Investment Management Limited hold the maximum interest in the company at 49.98% and 4.94%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick Look at Key Margins: For H1FY20, the company’s net margin stood at 11.3%, higher than the industry median of 8%. The company has a current ratio of 1.67x, higher than the industry median of 1.06x, demonstrating that the company is well equipped to pay its short-term obligations. The company has a debt to equity multiple of 0.22x, lower than the industry median of 0.48x. 

Key Metrics (Source: Refinitiv, Thomson Reuters)

April Quarter Update: For the quarter ended 30 April 2020, the company reported total saleable coal production of 2.28 million tonnes and sold 2.8 million tonnes of coal over the period. During the quarter, the production from Bengalla mine was impacted by mine sequencing, wet weather and a localised geotechnical issue. The production from Queensland operations was 16% lower than the previous quarter due to the completion of coal flow from Jeebropilly and ramp down at New Acland.

During the quarter, the company took several decisions to protect the ongoing health and wellbeing of team members and to help minimise the threat of COVID-19 entering the NHC site.

New Acland Stage 3 Update: Currently, 6 major coal projects of the company are waiting for Government’s approval. New Acland Stage 3 Project (NAC03) is at the top of the company’s wish list of resource projects. This project is expected to secure 150+ existing jobs, create 487 new full-time jobs and over 230 construction jobs over its life. Further, it is expected to provide energy security for its domestic customers who employ over 14000 Queenslanders. The company has asked the Queensland Government to grant Mining Leases, an Associated Water Licence and approval for the continued use of the Jondaryan loadout facility. These approvals are critical to ensure operations continue beyond Stage 2 as reserves on the existing lease are depleted. The Queensland Government has stated that it will wait for the High Court before making a decision on the project. Recently, the High Court of Australia granted Oakey Coal Action Alliance Inc (OCAA) special leave to appeal the orders of the Queensland Court of Appeal. OCAA has decided not to challenge the findings on groundwater or any other environmental issue that is relevant to any decision being made by Government.

Leadership Changes: On 10 July 2020, NHC’s Board appointed Reinhold Schmidt as the new Chief Executive Officer (CEO) of the company, effective from 1 September 2020. Mr. Reinhold Schmidt has 20 years of experience in the mining industry. His deep understanding of the Australian coal industry will benefit the company and he will help the company in navigating through a challenging period of lower coal prices and an ongoing process to obtain approvals for New Acland Stage 3.  On 15 July 2020, the company’s Chief Financial Officer, Matthew Busch, resigned from his post. NHC’s General Manager Corporate Development, Rob Bishop, has been appointed as interim CFO while a recruitment process for a permanent replacement is undertaken.

Change in Director’s Interest: Recently, one of the company’s Directors, Shane Oscar Stephan acquired 247,369 shares of the company by vesting of 94% of the 263, 158 Performance Rights under the Employee Performance Rights Share Plan.

Key Risks: The company is exposed to the risks related to the fluctuations in the prices of commodities like thermal coal and oil. The company’s operations are exposed to the risk of accidents which have the potential to cause harm to individuals. Further, the company’s activities expose NHC to a variety of financial risks including but not limited to commodity price risk, foreign currency risk and interest rate risk.

What to Expect: Due to the sudden decline in thermal coal prices and reduced coal production from the company’s Queensland coal operations, it is expected that the financial performance of the H1FY20 will be impacted. Currently, the company is focused on managing costs and risks across the business and obtaining Acland Stage 3 approvals. The company is carefully budgeting resources to develop future projects with a risk-managed approach.

Right now, the coal demand in Vietnam and Taiwan is strong. Further, the coal demand in China is also recovering with a rise in the Chinese industrial activity and power consumption. As at 31 January 2020, the company had cash and short-term investments of $61 million and total debt of $428.8 million. With a solid balance sheet and cashflows and longstanding banking and coal marketing relationships, the company seems well-positioned to meet the growing energy demands of its Asian customers.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  The stock of NHC has corrected by 29.77% in the past six months and is currently trading close to its 52-week low, offering investors a decent opportunity for accumulation. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Whitehaven Coal Ltd (ASX: WHC), Coronado Global Resources Inc (ASX: CRN) and Yancoal Australia Ltd (ASX: YAL). Considering the growth in the company’s top-line and bottom-line over the past five years, its decent operational performance in H1FY20, focus areas, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.350, up by 0.372% on 12 August 2020. 

NHC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.