Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Datt Capital principal Emanuel Datt explains why he loves one particular sector but only companies that operate in a particular state.
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The Motley Fool: What are the three best stock buys right now?
Emanuel Datt: I thought about this… I'd probably suggest a sector.
Why I say that is because, and as I point out, the markets are very rocky at the moment. But I think there's [a] very clear opportunity in New South Wales-based thermal coal stocks.
Queensland recently enacted a super for-profits tax or royalty over mines that are based in Queensland. This ultimately is going to upset Queensland miners quite significantly and it really reduces their competitive advantage against New South Wales mines.
Because ultimately New South Wales can afford to pay mine workers a lot more. They're not operating under that same royalty structure.
There are three particular stocks in this sector.
Whitehaven Coal Ltd (ASX: WHC) is a multi-mine thermal coal producer that operates solely in New South Wales. The second one would be New Hope Corporation Limited (ASX: NHC), which runs a single thermal mine in New South Wales, but also has a development project that [it's] still undergoing in Queensland. Interestingly enough, it's exempt from these new increases in Queensland royalties.
And the last one is Yancoal Australia Ltd (ASX: YAL), which is again a multi-mine thermal coal producer, with its operations almost entirely in New South Wales.
Quite concentrated in that sector but I think that the ability to earn US dollars is really a big advantage, given that the US dollar is traditionally a safe haven. As well as having exposure to just very positive demand tailwinds, stemming from this Russian invasion of Ukraine that's really thrown a lot of commodity markets out of whack.
MF: All three have seen their share prices rise a fair bit this year, but you feel like there's more room to grow?
ED: Yeah, absolutely. Just to give you an example, for this current quarter, we're expecting Whitehaven's operating profit to be somewhere around $1.2 billion. To put that into context against enterprise value, [it's] just about $4.5 billion. It's trading at less than one year's cash flow if thermal coal prices persist. Just incredibly cheap, but also they're actually returning a lot of capital back to shareholders through dividends and they're pretty much at the tail end of a 10% buyback, as well.
But, yeah, ultimately we think that these tailwinds for thermal coal are likely to persist for at least 18 to 24 months. That makes the valuation look extremely cheap.
