It's been an exercise in kicking thyself in 2022 for investors who ignored ASX coal shares or got out of them because they thought the transition to renewable energy was going to kill the coal industry quick.
Case in point: Whitehaven Coal Ltd (ASX: WHC) shares have skyrocketed 225% in the year to date.
Other pure-play ASX coal shares have also had many days in the sun this year.
The New Hope Corporation Limited (ASX: NHC) share price is up 194% year to date. Stanmore Resources Ltd (ASX: SMR) shares are up 173% year to date.
But according to Katana Asset Management, it's not too late to get in on the ASX coal shares party.
Why are ASX coal shares shooting the lights out?
ASX coal shares have skyrocketed in 2022 due to a supply/demand imbalance caused by the Ukraine war.
As we reported in late September, top broker Macquarie raised its outlook for the thermal coal price by 38% to 114% over CY23 to CY27.
The broker reckons developed economies are showing a "willingness to pay a premium to secure energy supply" given the global challenges.
The broker thinks the thermal coal price will lift by 25% to US$410 per tonne in the second half of CY22 and it will be US$367.50 per tonne in 2023.
As my Fool colleague Bruce Jackson notes, elevated coal prices are delivering huge profits to the miners.
Steve Johnson of Forager Funds says some coal companies "are generating almost their whole market cap every year in cash flow".
The coal price closed at US$405 per tonne overnight. That's up 66% year over year. The coal price hit a record of US$460 per tonne in September.
The stock to buy if you missed out on Whitehaven shares
Katana's Hendrik Bothma writes on Livewire that Yancoal Australia Ltd (ASX: YAL) is a sitting duck for ASX investors looking for good value today.
It could be an opportunity for investors who feel they've missed out on Whitehaven shares.
Bothma said:
With soaring coal prices these companies have been generating record revenue and eye-watering cash flow.
All bar one has received their share of air-time, and we think this laggard screams value. That company is Yancoal Australia.
Despite a market cap in excess of $7bn it lacks coverage and remains under-researched.
There are a few possible reasons for this… 62% of the company is owned by Yankuang Energy Group Co Ltd based in China, and until recently the company was facing a very different fate with crippling debt. This presents the opportunity, fuelled by strong coal prices the company has significantly de-risked over the past year, and now sits in a net cash position.
This turnaround has gone largely unnoticed due to the lack of coverage leaving the share price trading at a significant discount to peers.
YAL is a clear laggard from a lack of coverage, and their dramatic turnaround has gone largely unrewarded… it's only a matter of time until they re-rate.
The Yancoal share price is up 113% in the year to date compared to a 225% bump for Whitehaven shares.
Whitehaven shares versus Yancoal shares
Katana has done a comparative analysis of the two ASX coal shares.
Before we get into the detail, here is the bottom line as Katana sees it:
YAL is currently trading on a FY22e P/E of 1.4x and EV/EBITDA 0.9x. By comparison this represents a 71% and 66% discount to their closest peer. It's not often that you see a company generate billions in profit while trading on a P/E of <2x.
Consensus also forecasts YAL paying an FY22 full-year dividend yield of ~37% (unfranked), which is ~8x the ASX 200 average and means you get over a third of your investment back in dividends in one year. In contrast, WHC paid an effective yield of 15% in FY22 (5% dividend and 10% buyback).
WHC does however intend to undertake an additional 25% buyback if approved at the AGM this month, which would put them on a similar effective yield.
Katana's analysis comparing Whitehaven shares and Yancoal shares reveals a few salient points.
As per the Livewire article:
- Yancoal and Whitehaven are predominantly thermal coal producers with a rough 85% thermal and 15% metallurgical coal split
- Yancoal sells more than double the volume of Whitehaven and outsells other ASX pure-play producers
- They have similar operating cash costs but Yancoal generates almost double the free cash flow per share. Yancoal has a free cash flow yield of 85% compared to Whitehaven's 27%. That means investors today would pay 1.2 times free cash flow per Yancoal share compared to four times free cash flow for Whitehaven shares
- At the end of FY22, Whitehaven had a $970 million net cash balance. Yancoal moved from net debt of $3.4 billion with 40% gearing to a net cash position in July.
What's the latest news from Yancoal?
As my Fool colleague James reported earlier this month, Yancoal recently made a major debt repayment.
It prepaid US$1 billion of debt from available cash. This is expected to save about US$207 million in total borrowing costs over the loan periods.
The Yancoal share price is down 0.33% at the time of writing to $5.96. Whitehaven shares are down 0.7% to $10.61.
