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

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 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."