New Hope rallies on plans to buy back up to $300m

New Hope (ASX: NHC) was one of only 9 stocks on the S&P/ASX 100 with shares in the black ink an hour out from the close, after titillating the market with news of a major buy back over the next 12 months.

The coal miner’s share price is up around 6% following board approval for a share buyback worth up to $300m after chalking up record earnings on the back of rampant coal prices.

Management flagged the buy back after taking into account future expected operating and cash flow requirements.

Management also flagged a repeat of recently recorded strong cash generation with demand for high energy and lower emission thermal coal expected to outstrip ongoing tight supply.

Contributing to New Hope’s future upside will be the recently approved, New Acland project which has the capacity to increase production by 50%.

Good for balance sheet & shareholders

Today’s announced buy back follows a decision by rival coal giant Whitehaven Coal (ASX: WHC) to buy as much as a quarter ($2bn) of its own share register back on the market over the next 12 months.

Buy backs (aka share repurchase) are typically good for shareholders as they reduce the number of shares available on the open market.

Effective 17 November, New Hope’s buyback comes on the heels of the group’s record earnings results for the full year ended July 31 which saw revenue climb 143.5% to $2.6bn and net profit after tax (NPAT) soar to $983m.

Still undervalued

Despite a 224% rise over 12 months, the company still doesn’t believe the share price accurately reflects the underlying value of the company's assets.

The company clearly plans to capitalise on the recent softening in the Hew Hope share price after trading as high as $7.42 late October.

“… the buy-back represents an opportunity to enhance the value of the remaining shares on issue, as well as providing an opportunity to improve the liquidity of the stock," the company noted.

“We believe that the buy-back will benefit all our shareholders as it will reduce the number of shares on issue, thereby supporting the Company’s return on equity, earnings per share and dividend per share, for all shareholders who continue to hold shares in New Hope Corporation.”

Budget night downside

At face value, Hew Hope’s buy back should be a net-positive for the group and its shareholders.

However, on budget night the Labor government announced plans to scrap access to franking credits typically enjoyed by off-market buy backs.

While this won’t cause any grief for Whitehaven, it would be a big deal for New Hope which carries a franking balance of a whopping $800m.

Assuming the Labor government proceeds with plans to tinker with franking credits, the real value of the buy back may never see daylight.

What brokers think

Consensus on New Hope is Moderate Buy.

Goldman Sachs rates the group a Sell after lowering prices on weaking Europe demand. Target $4.40.

Based on Morningstar’s fair value of $6.97 the stock appears to be undervalued.

Based on the four brokers that cover New Hope (as reported on by FN Arena) the stock is currently trading with 9.4% upside to the target price of $6.65.

Citi maintains its Sell rating and raises its target to $4.60 from $3.00.

New Hope's share price over 12 months.