The Whitehaven Coal Ltd (ASX: WHC) share price has dropped around 30% since the start of 2023. The ASX coal share is still making big profits so in this article, I'm going to look at whether investors should be interested in the company.
Before getting into the financial side of things, Whitehaven Coal (and other ASX coal shares) may bring up the ethical question of whether we should even own part of a coal business. That's definitely a valid question and one I can't answer for every single investor. But it's understandable why investors taking ESG factors into account may choose to skip this stock.
Aside from that, let's look at some of the financial considerations.
Low earnings multiple?
It's fairly understandable that the business has a very low price/earnings (P/E) ratio. Profitable miners typically have a fairly low P/E ratio. Also, because it's a coal miner, many investors may be choosing not to invest in this one, lowering demand for the stock and its share price as a result.
Even so, in FY23, the company made earnings per share (EPS) of $3.08 and the current Whitehaven Coal share price is $6.33. That puts the current P/E ratio at around 2.
The 2023 financial year saw the coal price jump, leading to strong profitability. However, EPS is expected to reduce in FY24. According to Commsec, the ASX coal share may make EPS of 89 cents in the 2024 financial year, which could mean it's valued at seven times FY24's estimated earnings.
It still has a low earnings valuation, though it may not be quite as cheap if we look forward 12 months.
In terms of the market outlook, Whitehaven said the outlook is positive with "strong market dynamics" with a customer focus on energy security and longer supply contract terms expected to continue. Whitehaven mentioned that prices could rise as restocking "needs grow ahead of the northern hemisphere winter".
Dividend and share buyback
In FY23, the business paid out approximately 50% of its net profit after tax (NPAT) through a combination of dividends and share buybacks.
It bought back almost 120 million Whitehaven shares at an average price of $7.93, for a total of approximately $950 million. This improves future per-share statistics (such as EPS) and equity statistics (such as return on equity (ROE)).
The annual dividend per share in FY23 was 74 cents, which translates into a grossed-up dividend yield of 16.7% at the current Whitehaven Coal share price.
However, the expected earnings reduction in FY24 is expected to lead to a lower shareholder payout. Commsec projections suggest the FY24 annual dividend will be 27 cents per share, which is a potential forward grossed-up dividend yield of 6.1%. That doesn't seem especially appealing – plenty of other ASX dividend shares may pay stronger yields than that in FY24.
Huge cash pile and an acquisition?
Whitehaven currently has a market capitalisation of around $5.1 billion according to the ASX. It finished FY23 with $2.65 billion of net cash, so half of the valuation is backed by cash.
If we took the cash out of the business and removed that amount from the market capitalisation, the P/E ratio and dividend yield statistics may seem more appealing.
However, the business may have plans for that cash. According to reporting by the Australian Financial Review, the business is, or was, one of the contenders for a couple of BHP Group Ltd (ASX: BHP) coal mines.
Final thoughts
I don't think Whitehaven Coal shares are a clear opportunity. The dividend is expected to come right down, and I'm not confident the Whitehaven Coal share price will rise unless the coal price does. It doesn't strike me as good long-term value at this level, particularly with the longer-term future of coal being uncertain.
