Coal selloff a "dramatic over-reaction", Stanmore Buy rating retained: Morgans

Wed 22 Jun 22, 10:08am (AEST)
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Key Points

  • Morgans retains an Add rating with a 12-month target price of $3.35 for Stanmore
  • Broker is attracted to Stanmore's valuation, leverage to higher coal prices and dividends
  • The new royalty regime is expected to have a modest impact on earnings in 2022-23

Morgans said that the coal selloff was a “dramatic over-reaction” and retained an Add rating for Stanmore Resources (ASX: SMR) with a 12-month target price of $3.35.

“We retain our Add rating and remain attracted to Stanmore’s materially higher capital upside versus peers, superior upside valuation leverage to higher prices, M&A optionality and ability to frank dividends for Australian investors,” Morgans analyst Tom Sartor said in a note on Tuesday.

Queensland-based coal miners including Terracom (ASX: TER) and Coronado Global Resources (ASX: CRN) were smashed on Tuesday after the local government announced a massive royalty hike for coal sales

From 1 July 2020 coal royalties will face an additional three tiers including:

  • 20% for prices above $175/t

  • 30% for prices above $225/t

  • 40% for prices above $300/t

Whereas the royalty was previously 15% for prices over $150/t. 

A modest impact

Stanmore’s recent moves appear dislocated from fundamentals, said Morgans. Noting that the company’s stock has fallen -35% in a fortnight and at one stage, down as much as -27% on Tuesday.

Stanmore price chart
Stanmore 12-month price chart

“Fears around global steel activity are valid, but today’s [Tuesday, 21 June] move looked like panic,” said Sartor. 

“Windfall royalties only get incurred as a function of windfall revenues. Our Base case forecasts (falling below US$190/t by 2024) sees Stanmore only incurring additional state royalties in the new A$ pricing brackets in CY22 and CY23, with no cash impact thereafter."

Morgans expects Stanmore to pay an additional US$146m in royalties over 2022-23, which will slow its de-gearing and ability to give back capital to shareholders. However, the “absolute impact (6.5% of 2022-23 EBITDA) is modest,” said the broker. 

Capital raising exacerbating weakness

Stanmore raised a massive $694m in March to fund its acquisition of BHP's Mitsui Coal business.

The raised issued approximately 631m new shares, representing 233% of Stanmore shares on issue at $1.10.

"The vast majority of Stanmore's 24% free-float comprise of 187m shares issued at $1.10 as per the March acquisition equity raising," said Morgans.

"It's easy to see how turnover of this stock on recent uncertainty can contribute to artificial price weakness."

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Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University and was Vice President of the University Network for Investing and Trading (UNIT). He is an avid swing trader, and drawn to breakouts and technical set ups. Outside of writing and trading, Kerry is a huge UFC fan, loves poker and bouldering.

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