After falling 22.5% on the ASX 200 so far this year, I think the New Hope Corporation Limited (ASX: NHC) share price is a buy.
Background on New Hope Corporation
New Hope Corporation is involved in oil, gas and coal exploration, development, production, processing, transport and sale. The group's main assets are in Queensland, New South Wales and Victoria. It currently has a market capitalisation of $2.12 billion.
Why I think it's a buy
New Hope Corporation has a price-to-earnings (P/R) ratio of 14.25x – a discount on the ASX 200, which has a price to earnings ratio of 18.25x (at the time of writing). While coal prices have been down, the group had positive results for the first half of the 2019 financial year.
The company offers a generous grossed-up dividend yield of 7.8% with dividends increasing so far in the 2019 financial year. These numbers mean that we may see New Hope Corporation on a grossed-up dividend yield of more than 10% in the near future at the current share price. This is a huge benefit for new buyers of this stock and means great returns.
New Hope Corporation was recently involved in the acquisition of an additional thermal coal mine in NSW, taking an 80% stake. This low cost, high quality mine will contribute an additional $126.6 million profit per year before tax and unusual items. This is a huge additional boost to the earnings of the group and should see New Hope Corporation post further record profits.
The main reason that the share price of New Hope Corporation has been punished so badly this year is likely to be due to the reduction in the price of coal. However, the group released a chart along with its half year results that showed demand for coal from Asia is actually increasing and is likely to remain high until at least 2040. This elevated demand should mean that the coal price can recover and remain higher in the long term.
As a well-established producer, the present reduction in coal prices could be a long term benefit for New Hope Corporation. This is because it works to make it less desirable for new coal producers to enter the market, which will help prices to recover and help to sustain prices above current levels. Additionally, the group points out in its half year results that coal supply takes up to 4 years to respond to higher prices, something the group can respond to immediately.
Foolish takeaway
New Hope Corporation's earnings are strong and it has a high dividend yield. The effect of the current reductions in the coal price that have seen the share price of the group fall in 2019 are likely to be overstated. I think it's a buy.
