Shares in Whitehaven Coal Ltd (ASX: WHC) are inching higher in afternoon trade today and now fetch $2.575 apiece.
It's been a gut-wrenching period of volatility for Whitehaven shareholders these last 2 months. After cruising to a high of $3.59 in early October, it's been nothing but downward-sloping returns for the Whitehaven share price ever since.
The selling pressure has now levelled off, but shares are hovering at 3-month lows. However, the team at Morgan Stanley says investors are letting one crucial factor go unnoticed.
Let's take a closer look at the situation.
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What's up with Whitehaven lately?
There hasn't been too much out of Whitehaven's camp of late. Investors began selling Whitehaven in droves alongside a large drop in thermal coal pricing from early October.
In a period of 2 weeks, coal prices fell at a rapid pace from a 12-month high of US$269.50/tonne in October to US$140.90/tonne by November amid production curbs in China.
Given that Whitehaven is an ASX resource company that produces coal, it is considered a price taker. Its share price is therefore sensitive to fluctuations in the coal markets, as it can impact earnings.
Whitehaven's share price fell 40% amid the sinking coal price from October to November, which also fell 48% in around the same time.
GC Newcastle coal futures have recovered slightly towards US$160/tonne as we approach December, which might have saved Whitehaven's share price somewhat.
What are investors missing?
Despite the pullback, analysts' at Morgan Stanley reckon investors are overlooking a crucial factor in the coal giant's investment case.
The firm notes that Whitehaven has benefitted in revenue and free cash flow from the rally in coal prices. This, the broker reckons, is helping Whitehaven reduce its debt at an accelerated pace. It notes that the miner is deleveraging its balance sheet at over 2x faster than it did during the last market upswing.
On valuation grounds, Morgan Stanley also notes Whitehaven is trading below its lowest forward multiple in 5-years, based on the broker's FY22 earnings.
This disconnect in Whitehaven's valuation and its rapidly declining debt figure is under-appreciated by the market and could be a positive catalyst, the broker says.
Despite the recent commitment of several nations to phase out coal power at the recent COP26 summit, Morgan Stanley thinks that Whitehaven's share price is set to jump. It also thinks shareholders have some juicy dividends to look forward to from the company's stronger balance sheet.
Whitehaven share price snapshot
Despite the recent headwinds, the Whitehaven share price is still up 66% in the past 12 months, after rallying another 57% this year to date.
In the past month, it has reversed course and lost 11%. However, investors appear to be catching the lows, and shares are now 5% in the green over this past week.
