Whitehaven is a compelling de-gearing story: Goldman Sachs

In an era of ESG evangelism espoused by a growing number of institutional investors around the sectors they will and won’t hold within their portfolios, carbon-based fossil fuels like coal are now considered by a growing cohort to be persona non grata.

However, Goldman Sachs has a positive outlook on thermal coal into 2022 with a strong recovery in global power demand - due to ongoing power shortages - with supply side issues helping to deliver strong gas prices.

Goldman Sachs also has a constructive outlook on metallurgical (met) coal which the broker sees as being undersupplied, albeit with prices moderating into 2022.

Re-rating

With Whitehaven Coal (ASX: WHC) down around -30% off its 12-month high ($3.64/sh) and trading at a 15% discount to Goldman Sachs’ net asset value (NAV) and around 50%-10% free cash flow (FCF) yield in FY22/FY23, the broker has upgrades Whitehaven to Buy from Neutral.

With the company expecting to move into a net cash position in first quarter 2022, the broker sees Whitehaven as a compelling de-gearing story and has increased FY22-23 earnings 0%-3% on higher coal prices for the quarter and sees increases to semi-soft and pulverised coal injection (PCI) prices for 2022.

Capital returns over growth

The broker concludes that having reset balance sheet targets along with their FY21 result – with the company now aiming for $0-300m of net debt and leverage of 0.5x through the cycle – Whitehaven is indicating a preference for capital returns over growth capex.

To focus more on capital returns over organic growth, the broker expects Whitehaven to increase the company’s minimum dividend payout to 50%.

Downside risks

While the company’s December quarter coal production and sales appear to have been impacted by wet weather in NSW - with realised thermal coal prices likely be a -15% discount to benchmark - this has not impacted Goldman Sachs positive view on the company’s FCF and valuation.

However, the broker flags the likelihood of lower thermal coal prices/premiums in 2022 due to increased supply from large producing like Russia, China, and Indonesia.

Given that Whitehaven’s operations are all in Australia, the broker also notes the negative impact of a strengthening A$, while operating seasonal wet weather can also impact open pit production.

What other brokers think

• Citi upgraded Whitehaven to Buy from Neutral after the recent strong retreat in the share price, and the target price eased to $3.20 (09/12/21).

• Morgan Stanley’s Overweight rating and $3.80 target price retained (25/11/21). 

• Credit Suisse Outperform rating maintained, and target rose to $4.50 from $ 4.00 (03/11/21).

• Macquarie retained Whitehaven Coal's Outperform rating and $3.90 target price (21/10/21).

• Morgans retained Add rating and increased target to $3.92 from $3.85 (20/10/21).

• Ord Minnett retained its Buy rating and lifted its target price to $4 from $3 (02/09/21).

Whitehaven is currently trading at a -37.3% discount to the consensus target of brokers covering the stock (as reported on by FN Arena).

Consensus on Whitehaven is Strong Buy.

The stock was trading -5.25% lower going into lunchtime today.

Whitehaven Coal six month share price performance versus the ASX200