Materials

The coal selloff is overdone: Why Citi sees a buying opportunity for Stanmore

Mon 03 Jun 24, 3:03pm (AEST)
Coal 3 Mining
Source: iStock

Key Points

  • Citi analysts believe met coal prices have bottomed around the low-to-mid US$200 a tonne level
  • The broker initiated coverage of Stanmore Resources with a Buy rating and $4.00 target price
  • Stanmore's earnings and free cash flow yield is set to recover in 2025 and dividend yields are forecast to peak at 10% in 2026

Coal stocks have garnered notable attention from traders, yield hunters and value-seeking investors. And if you take a look at how the large cap names have been trading – you'll know why.

Whitehaven Coal (ASX: WHC) is up around 30% since mid-March and trying to break out to 16-month highs.

The ASX's dividend king – Yancoal (ASX: YAL) – which currently has a trailing yield of 10.5%, is up 25% since April and not far off a multi-year high.

New Hope (ASX: NHC) shares have recovered the losses from late February, where the stock sold off around 12% after first-half FY24 earnings missed analyst expectations. Its latest quarterly (announced 20 May) noted solid production and sales at its Bengalla project, offset by a slower-than-expected ramp up at New Acland.

Met coal sell-off overdone: Citi

Citi recently raised its 6-12 month price target for met coal from US$250 a tonne to US$275 a tonne. "We were directionally bearish coking coal since our Annual Outlook in December, but the recent selloff looks a bit overdone," the analysts said in a note on Monday.

The Australia prime hard coking coal (HCC) benchmark price has slipped US$100 a tonne year-to-date to reach around US$200 a tonne or the lowest level since July 2023.

"The persistent weakness in China steel market amid consecutive rounds of met coke price cuts has translated into seaborne coking coal price weakness," the report said. "Still, we expect restocking to gain steam following the recent seaborne price collapse, supporting the Australia prime HCC benchmark in the low-to-mid- US$200/t range in 2Q-3Q."

"Following the temporary slowdown, economic activities in India should recover post-election, and pre-monsoon restocking should also support imports."

The report cited several data points on global steel production, which explain the recent weakness in HCC prices and why the analysts are more upbeat about the future. Some of the key numbers include:

  • China steel production in April down 7.2% on pcp and down 3% year-to-date

  • World (ex-China) steel production in April down 2.2% but up 1.8% year-to-date

  • World steel production in April down 5% on pcp and down 0.9% year-to-date

"Importantly from a met coal perspective, Indian steel demand is forecast to be up 8.2% in both CY24 and CY25."

"Buying opportunity for Stanmore"

Citi analysts believe Stanmore (ASX: SMR) appears cheap on valuation metrics and well positioned to benefit from the accelerating growth in India's steel industry. The report initiated coverage on the stock with a Buy rating and $4.00 target price.

In 2023, Stanmore acquired the remaining 20% stake in BHP Mitsui Coal (BMC), bringing its production mix to 7% thermal coal and 93% metallurgical coal.

"The limited attention on this stock could be attributed to Stanmore being a relatively new coal company as this commodity is often avoided due to general ESG concerns," the report said.

"This lack of focus presents a unique opportunity as we believe the stock is undervalued and overlooked. Stanmore's metallurgical coal will remain a crucial input in Asian steel blast furnaces for the foreseeable future and underscores Stanmore's importance in the global steel supply chain."

Stanmore has underperformed most of its large cap peers, with the stock down 16% year-to-date vs. Yancoal (+33.3%), Whitehaven (+10.4%) and New Hope (-1.1%).

Here are some of the key earnings and financial projects from Citi:

 

CY23

CY24

CY25

CY26

EBITDA (US$m)

1,091

842

823

845

Net Income (US$m)

472

281

310

373

EPS (US cents per share)

52.4

31.2

34.4

41.4

DPS (US cents per share)

14.2

9.0

17.2

20.7

Dividend yield

6.9%

4.4%

8.3%

10.0%

Free cash flow yield

29%

-3%

27%

27%

As the model suggests, Stanmore's earnings and free cash flow are forecast to trough in 2024 and rebound strongly in 2025-26. The analysts expect dividend yields to peak in 2026 at 10%.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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