Yancoal (ASX: YAL) is notorious for its remarkably high dividend yield – Averaging an annual dividend yield of approximately 20% in the past three years. Such a high dividend yield is typically misleading, unsustainable or in other words, a dividend trap.
But that was hardly the case for Yancoal's full-year 2023 result. The company issued a final fully franked dividend of $429 million or 32.5 cents per share. The final dividend, combined with the company's 37 cents per share interim dividend, represents a 14% dividend yield based on its year-end share price of $4.95. It's a top effort given the sharp decline in thermal coal prices.
Emanuel Datt from Datt Capital says we're near the bottom of the coal market. And when you bring in factors such as Yancoal's cheap valuation, diversified production, and low cost base – It might be worth taking a closer look at the ASX's dividend king.
In this wire, we dissect the company's latest full-year results (announced after market close on Friday, 23 February), and discuss the outlook for coal, as well as key risks for Australian coal miner.
Financials:
Revenue down 25.7% to $10.5 billion
Operating EBITDA down 50% to $3.49 billion
Profit after tax down 49% to $1.82 billion
Net cash down 38% to $1.25 billion
Operations:
Run of mine coal production up 19% to 60.2 million tonnes
Total attributable coal sales up 13% to 33.1 million tonnes
Average realised coal price down 39% to US$232 a tonne
Cash operating costs up 2% to $96 a tonne
Full-year 2024 guidance:
Capital expenditures A$650-800 million
Attributable saleable production is expected to be between 35-39 million tonnes.
Cash operating costs are expected to be between A$89-97 a tonne.
The best way to describe it in one word would be “resilient.” The broader thermal coal market has been relatively soft in terms of price. However, the company has managed to alleviate margin pressures by scaling up production and resolving past production issues. That’s lowered the cost base which has enabled its earnings to not experience the significant decline in margins you might expect.
The business itself was very resilient and cash generative. However, I think it may have disappointed on the final dividend. They announced a fully franked dividend of 32.5 cents per share. Market expectations were slightly higher, around the 40-50 cents range. In a nutshell, the company decided to retain a lot more cash than what the market expected.
A 50-cent dividend was my number. But they’ve got well over a billion dollars on the balance sheet... so it will have to find its way back to shareholders.
Rating: BUY
I think in the longer term, I would have a BUY on this. Yancoal trades at extremely low multiples compared to other resource companies, including those that lie outside of the coal sector.
We’re clearly at the bottom of the market for thermal coal prices as well as the broader set of coal products that it sells. The company has a small portion of production that’s metallurgical coal and we expect that to remain resilient on the pricing side.
Being able to buy a company that’s well diversified in terms of production, that owns large scale and cash generative assets, right at the bottom of the cycle at a very modest multiple – It’s a pretty good set-up for long-term returns.
I have a positive outlook, with the caveat that thermal coal prices don’t fall a great deal more. The company has guided towards lower costs for this calendar year. If coal prices stay where they are today, it’ll come with another good result for 2024.
The second part of the equation is whether valuation multiples expand for the sector. Yancoal is the biggest pure-play coal exposure on the ASX and positioned to benefit from multiple expansion.
Weather is a big one given that the majority of Yancoal’s assets are open pit. The company has faced flooding in the past and did not have the right licenses to discharge the water. These risks have been mitigated from our understanding but it’s always one of those X factors. The availability of labour and materials is another risk that could affect the cost of production.
I don’t think Yancoal carries much regulatory risk given its assets have been in production for many years and the world still runs mostly on coal and other forms of legacy energy.
Rating: 3
I’m neutral as certain parts of the market such as healthcare appear reasonably expensive relative to other parts of the market like energy, which are very cheap in comparison. A second point would be that small cap stocks are underpriced relative to larger cap stocks. That’s another dynamic that I’m seeing as well.
This article first appeared on Livewire Markets.
#1 - Read Announcement - YAL 2023 Financial Results Presentation
#2 - View Presentation - YAL 2023 Financial Results Market Release
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