This stock's first-half profits are up 135%, and there may be more to come

This article was first published for Livewire Markets on Thursday 16 February 2023.

The energy rally has been in our lives for over a year now, with coal prices being the first to benefit in the early COVID-19 era. 

Thermal coal prices are currently in the A$200/tonne range, cut down by half from their record highs of over $400, but still dramatically elevated over pre-COVID pricing. 

One of the major ASX beneficiaries has been Whitehaven Coal (ASX: WHC). Four years ago, you would have been hard pressed to find anyone willing to shine favour on the stock. 

The pandemic and its associated energy shocks re-branded the entire sector, with Aussie investors (both at home and uptown) now beyond willing to seriously consider value opportunities. 

Emanuel Datt, founder and Chief Investment Officer at Datt Capital, believes there's still upside to go despite the share price being down 28% since its recent high.

Read on to learn about WHC’s latest earnings report, the risks that could be on the horizon, as well as why Emanuel believes Whitehaven is still a buy.

WHC’s 1-yr share price performance versus the S&P/ASX 200. (Source: Market Index)

Note: this interview took place on Thursday 16 February 2022.

Pictured: Datt Capital founder and CIO Emanuel Datt

Whitehaven Coal H1 Key Results 

• Revenue of $3.81bn, up +164% 

• Adjusted EBITDA of $2.65bn, up +319% 

• Net profit of $1.78bn, up 135% 

• Interim dividend of 32c, missed consensus of 45c-50c

• Opex of $381.1m, up 17% 

• Coal price of A$552/t and unit cost of $96/t

• Earnings per share of 199c, up 141%

Key company data for Whitehaven Coal

(Source: Market Index)

In one sentence, what was the key takeaway from this result?

Whitehaven is still an incredible cash-generating machine. 

We've seen some softness in high-quality thermal coal. We think this is a temporary situation, and we think supply remains constrained looking forward. That should bode well for Whitehaven, going forward.

What was the market’s reaction to this result? In your view, was it an overreaction, an under-reaction or appropriate?

The market was slightly underwhelmed. Despite absolutely stellar financial performance, I think that the market was expecting a larger dividend than was disclosed. 

So the company effectively disclosed an interim dividend of 32 cents per share. Consensus expectations were a little higher, somewhere around the 50 cent mark I would say. However, that's not necessarily detrimental from our perspective because the cash does remain on the balance sheet.  We also are aware that the company has shareholder approval to undertake what's the single largest proportionate share buy back in Australian markets that we've seen or that we're aware of. So it's not all doom and gloom, but ultimately I think that the company's down about 2% or thereabouts today off the back of these results.

“The company has shareholder approval to undertake what's the single largest proportionate share buy back in Australian markets that we've seen."

It's probably from investors that were perhaps looking at Whitehaven as a more yield-generated opportunity, rather than focusing on other capital returns that are longer term in nature.

What was the main reason behind the dividend missing consensus? 

I think ultimately it's a capital allocation decision. 

Cash dividends are obviously highly sought after by people who invest in stocks for income. However, for a long-term holder or investors that have a timeframe that is more than a year, I think that share buybacks do make a lot of sense. 

Of course, assuming that the underlying fundamentals of the business will continue to be sound in future years, that's the big presumption. 

“If a stock is mispriced, which is what we believe Whitehaven is, I think that there's more value as a long-term holder to be buying back stock”

A dividend gives you certainty, you've got cash in hand and you're happy. But I think that if a stock is mispriced, which is what we believe Whitehaven is, I think that there's more value as a long-term holder to be buying back stock at very low multiples, and hopefully benefiting from that decision in future years.

Were there any major surprises in these results that you think investors should be aware of? 

I don't think there were any major surprises. I think that one figure that really stuck out to me was the cash generated from operations in the first half of FY23 was actually almost equal to the entire financial year '22, so the entire year. 

So in six months, they've generated almost the exact amount of free cash flow as the last financial year. So that was just an incredible statistic to comprehend.

Would you buy, hold or sell Whitehaven on the back of these results?

Rating: BUY

Why I say that is I believe the company is doing the right thing by long-term shareholders in terms of taking a disciplined approach towards capital allocation and undertaking initiatives that will benefit long-term shareholder, over a short term sugar-hit initiative. 

“I think there's still very real constraints throughout the energy industry itself, and high-quality coals that Whitehaven sells are a key component to helping resolve this in many ways”

But I also say it's a buy because we are convinced the energy crisis isn't going to be resolved overnight, despite the Northern Hemisphere coming into the summertime. 

I think there's still very real constraints throughout the energy industry itself, and high-quality coals that Whitehaven sells are a key component to helping resolve this in many ways. So I think structurally, we don't see things changing, at least for the next 12 to 24 months.

What’s your outlook on Whitehaven Coal and the sector over the year ahead? Are there any risks to the company and the sector that investors should be aware of?

I think as a commodity-producing company, of course the commodity price is first and foremost in everyone's mind. So we have seen the spot price of thermal coal fall considerably back to about the $200 a tonne range. We've seen it rise as high as $450 a tonne. 

So it's effectively been cut in half from its highs. But it's really important to understand the long-term context. 

Going back maybe three years, back to 2020, coal prices were sub $100 at that stage. So looking at things through a long-term prism, coal prices remain incredibly elevated from where they have been historically. However, we feel that's been driven by fundamental factors first and foremost, rather than any short-term dislocation.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 4 

I'm cautious because I believe that even though we've seen some compression in price multiples more broadly across the market, especially in the technology sector, I think broadly as a whole, the market still remains relatively elevated, especially considering we are seeing an upward trend in interest rates. 

This means that keeping alternative forms of investment—varying returns for example on term deposits—being able to earn 5% in a term deposit is an attractive alternative for some people, rather than keeping their money at risk in the stock market itself. 

So I think that as interest rates rise, these alternative or competing forms of capital allocation have really become more prevalent as an alternative option to the stock market.

I think that that sort of informs our somewhat slightly bearish view. I'm not saying that stock markets are going to fall off a cliff in the short term, but I think that could be a bit of a grind down or a gentle downward bias.

10 most recent director transactions

(Source: Market Index)