The future of ASX coal shares could be burning bright. This is despite their product falling out of favour with the majority of Australians.
While environmentally-conscious investors have shunned the polluting sector, at least one fund manager believes there is significant upside to some ASX coal miners.
The portfolio manager of the Atlantic Pacific Australian Equity Fund, Nicolas Bryon, is a big believer. He reckons the financial results to be reported by coal companies will be "bigger than Ben-Hur", as reported by the Australian Financial Review.
ASX coal shares are on fire
ASX coal shares are already on fire over the past year. The share prices of Whitehaven Coal Ltd (ASX: WHC) and Yancoal Australia Ltd (ASX: YAN) have tripled in value over the period.
The New Hope Corporation Limited (ASX: NHC) share price isn't far behind with a 160% advance. In contrast, the S&P/ASX 200 Index (ASX: XJO) is barely in the black over the last 12 months.
Overflowing coffers
It seems ASX coal shares have not finished outperforming either. Bryon believes the market remains slow to appreciate the fundamental upside that is yet to come. Some coal shares could even outpace their iron ore brethren.
Bryon commented to the AFR:
As we saw with the rally in iron ore over the past couple of years post-COVID-19, the extreme cashflow generation led to dramatically increased dividends and buyback potential of more than 10 per cent of equity.
In the case of thermal coal companies over the coming year, this increases by at least a factor of two. I have never seen anything like this in my entire career which spans 25 years.
Mega share buybacks and capital returns
What has gotten him so excited is his belief that the cash ASX coal miners will produce over the next few quarters will be so large that they could buy back all their shares on market – "and then some".
ASX iron ore shares like BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have won favour thanks to their outsized dividends and capital management programs.
They have funded their generous handouts through the high prices they are getting for their iron ore.
Top buy picks among ASX coal shares
Coal is also in hot demand, particularly since the outbreak of the Russian-Ukraine war. The large cap ASX coal miner that Bryon is backing is Whitehaven.
At the smaller end of the market, the fundie likes the Terracom Ltd (ASX: TER) share price.
However, there is such a thing as too much of a good thing. Bryon acknowledges that he is worried that extreme coal and energy prices could trigger a recession.
