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The Yancoal share price is down 25% in 2019. Should you buy?

The Yancoal Australia Ltd (ASX: YAL) share price is down 24.7% in 2019 – I think it’s time to buy.

Background on Yancoal

Yancoal is a coal miner with operations in New South Wales, Queensland and Western Australia. It has a market capitalisation of $3.84 billion.

Why I think it’s a buy

Yancoal has a price-to-earnings (P/E) ratio of just 4.45x. This is a significant discount to the ASX200, which has a P/E ratio of 19.24x at the time of writing. The reason why Yancoal trades at such a discount is relatively simple – coal prices have dropped recently. However, Yancoal has maintained healthy earnings and is ready to increase production in response to higher coal prices if there is any improvement.

Yancoal offers a grossed-up dividend of 6.3%, which comes unfranked. This is a solid return in an environment with interest rates of just 1%. In the company’s recent interim result, its management outlined a plan to maintain a pay out ratio of 50% of earnings in 2019. This suggests that its management are eager to return profits to shareholders.

The company trades on a price-to-book ratio of 0.66. This is very low and suggests that good value is offered at the current share price. Additionally, the company posted a return on equity of 14.1% in 2018. This suggests that if Yancoal can maintain earnings, it offers huge potential returns to shareholders.

Another point that Yancoal can boast is quality. As pointed out by its management, Yancoal produces high energy thermal coal that has a much higher energy content than coal from other countries, and management are confident the company can maintain a high level of demand for its coal and relatively good prices.

Yancoal does come with some risk, with a debt-to-equity ratio of 70.7%. However, its management have already started to reduce this debt and net debt is down by over $1 billion since 2018. Additionally, net debt after considering the liquid assets of the company is much more comfortable, with net debt to equity at 50%.

Foolish takeaway

Yancoal trades at a very low P/E ratio and a low price to book ratio. While the company carries some debt and coal prices have been down recently, it offers great value. I think it’s a buy.

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Motley Fool contributor Chris Chitty 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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