Unlike other resource companies on the S&P/ASX 200 (INDEXASX: XJO), Whitehaven Coal Ltd (ASX:WHC) has had a subdued 2019 with the company’s share price down nearly 17% for the year. However, a strong quarterly report could indicate that the coal market is recovering and the Whitehaven share price may be a long-term buy.
Strong quarterly results
Whitehaven finished the financial year with a strong June quarterly report. For the quarter, coal production was up 25% from the previous corresponding period, achieving a run-off-mine (ROM) production of 7.3 million tonnes (Mt). This resulted in Whitehaven beating guidance with a full-year coal production of 23.2 Mt. The beat in FY19 production was driven by record production from Whitehaven’s Maule Creek and Narrabri operations.
Saleable coal production for the quarter was 5.2 Mt, resulting in total coal sales of 21.6 Mt for the year, 2% lower than FY18 sales. Whitehaven was able to offset weaker sales volumes by receiving better than expected prices for thermal coal. Whitehaven reported that it received an average of $US84 per tonne of thermal coal, 5% better than the benchmark and higher than the $US80 per tonne estimated by analysts.
Following record cash flows generated over the past year, Whitehaven has indicated that the company will share the prosperity with shareholders. Analysts expect that Whitehaven will confirm its second consecutive year of record full-year profit on 15 August. Last year, the company paid out more than 75% of net earnings, with shareholders receiving 40 cents per share for fiscal 2018. With low levels of debt on the book, Whitehaven is set to reward shareholders with higher dividends into the future until the company’s growth projects require cash.
Recently, analysts at Morgan Stanley retained their buy rating on Whitehaven and issued a $5.00 share price target. Although a broker note shouldn’t serve as a catalyst to buy shares in a company, it does show where institutional sentiment lies in the short-to-medium term. Analysts cited Whitehaven’s strong quarterly performance and 4.3% dividend yield as great value at the current share price
Is it a buy?
The performance of Whitehaven’s share price this year implies a bearish outlook for the future price of coal. Thermal coal markets have softened over the past 12 months due to lower prices of alternatives like LNG in Europe and Asia and Chinese import restrictions. Despite a strong quarterly report, the outlook for Whitehaven’s share price looks uncertain.
For long-term and income investors, Whitehaven’s dividend yield makes the share price an attractive option. However, I think the more prudent action would be to wait for the share price to base and for the thermal coal prices and trade tensions to recover.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. 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 Scott Phillips.