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The Whitehaven Coal share price is down 13% in 2019: Is it a buy?

The Whitehaven Coal Ltd (ASX: WHC) share price is down 13% so far in 2019, making it a buy, in my opinion.

Background on Whitehaven Coal

Whitehaven Coal is a coal producer with assets in New South Wales (NSW). It has both development assets and existing projects in operation and produced around 23 mega tonnes of coal in the 2018 financial year. At the time of writing, the group has a market capitalisation of $3.85 billion.

Why I think it’s a buy

Whitehaven Coal has a price-to-earnings (P/E) ratio of just 7.19x. This is a heavy discount to the ASX 200, which has a P/E ratio of 17.99x at the time of writing. The company’s earnings come from 6 main mines in NSW, with more mines in development.

Whitehaven currently has a generous dividend yield of 7.2%, which comes unfranked. So far in the 2019 financial year, dividends have been higher than those for the 2018 financial year. The company had a payout ratio of just 52% in the 2018 financial year, meaning that almost half of profits were retained to develop assets further.

Whitehaven Coal has manageable costs with guidance for the 2019 financial year, suggesting that this will be about $67 per tonne. Even with the reduction in the coal price so far in 2019, undoubtedly the reason for its lower share price, Whitehaven should still be profitable. Where margins have been reduced, the company will attempt to make up for this with volume. A release from the company in May suggested that production will grow to over 40 mega tonnes by 2030, which is almost double the production from the 2018 financial year. In its June 2019 quarterly production statement, the group announced that it had increased production of saleable coal by 9% on the same period last year.

The company also boasts that demand for its coal is growing significantly in India and South East Asia. While demand from China and Japan are expected to reduce, the company has forecast that demand for metallurgical coal from India and thermal coal from South East Asia will outweigh this reduction in demand between the present and 2040. If the group’s expectations are correct, coal prices should have plenty of room to recover. 

Foolish takeaway 

Whitehaven Coal trades on a low P/E ratio. It is ramping up production and should maintain profitability through the present period of reduced coal prices. If the group’s expectations about coal prices are correct, a significant rerating is justified for this company.

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Motley Fool contributor buylowsellhigh5 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.

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