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Top broker tips double-digit returns for this stock even after the doubling in its share price

One of the best performing stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) still has more left in the tank to run ahead in 2018 even though its share price has nearly doubled in the past six months, according to Credit Suisse.

The broker is referring to Whitehaven Coal Ltd (ASX: WHC), which has run up by more than 50% since July last year, which is nearly twice the gain made by sector leaders BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

Whitehaven suffered a pretty big sell-off last week after posting its December quarterly production report, although the stock has regained some ground today as it gained 1.4% to $4.39 in late afternoon trade.

Roof issues at its Narrabri mine that required extra reinforcements to be added has taken some of the wind out of its sails and given shareholders an excuse to take profit after its strong rally.

Investors were aware of the roof issue but didn’t think extra support was needed so soon. The reinforcements will add to cost pressures at the mine with ongoing cost increasing by $2 a tonne as management cut FY18 production forecast to 20.5 to 21 million tonnes.

Credit Suisse thinks investors were too focused on the negatives and may have overlooked some of the positives from the announcement.

Production guidance for Narrabri had actually been upgraded for FY19 and FY20, while production at its Maules mine was lifted for the current financial year. While the upgrade for Maules was modest, the broker thinks it’s a good basis for management to launch the next step-up of production at the mine.

But what is really making the broker excited is its upgrade in thermal coal pricing forecasts. Credit Suisse has lifted its pricing assumptions for the commodity by 17% in calendar 2018, 24% in 2019 and 18% the following year.

“Being as simplistic as possible, if we assume all ~17Mt sales are now done at a coal price US$12/t higher, this is >A$250 million in additional FCF [free cash flow] per year,” said the broker.

“Yes, Narrabri costs are up, sales of uncommitted met coal from Maules is challenging and yes 17Mtpa isn’t the exact number for every year we know, but the FCF generation leverage in this business is huge.”

This is why Credit Suisse has materially upped its share price target on Whitehaven to $4.60 from $3.40 a share and upgraded its recommendation on the stock to “outperform” from “neutral”.

The upside for the stock to the new price target may not sound like much, but the gain will be in addition to the 26.11 cents a share dividend that the miner is expected to pay in FY19. This puts the stock on a yield of nearly 6%.

Adding in the potential capital gain, the stock could deliver a 12% upside from its current share price.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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