Whitehaven Coal Earnings: Record Profit on High Thermal Coal Prices

No-moat Whitehaven Coal’s WHC fiscal 2023 result was another record given high prices. Net profit after tax of AUD 2.7 billion, or AUD 3.03 per share, was up 37% on last year and 8% above our expectations. EBITDA rose 30% to about AUD 4 billion while Whitehaven generated significant free cash flow of AUD 3.3 billion, or AUD 3.75 per share. The average coal price of AUD 445 per metric ton, also 37% higher than the AUD 325 last year, drove the record result with coal sales volumes down 8%. Along with inflation, lower volumes saw unit costs rise 23%, to AUD 103 per metric ton. The AUD 0.42 per share fully franked dividend was more than we expected, taking total 2023 dividends to AUD 0.74. Including share repurchases, the payout ratio of 50% was at the top end of the target range.

We retain our AUD 9.50 per share fair value estimate for Whitehaven and still see it as undervalued. We think this is due to the market assuming thermal coal prices fall from elevated levels relatively quickly. However, we think Whitehaven’s generally high-quality coal—high energy, low ash—is likely to remain in demand in Southeast Asia in particular. It helps meet energy needs while reducing emissions relative to lower-quality coals.

There is a risk New South Wales will increase royalty rates in coming years. Offsetting much of this risk is a potential extension of the state’s coal reservation policy, which Whitehaven could satisfy by selling its lower-quality coal. Increased royalty rates could also create a headwind to new supply, which could inflate long-term or midcycle thermal coal prices above our assumed USD 90 per metric ton from 2027. However, assuming none of these benefits arise, if royalty rates rise to 10% from the roughly 7.5% Whitehaven pays now, our fair value estimate falls to AUD 9.00 per share. Royalty rates of 12.5% and 15% see our fair value estimate fall to AUD 8.50 and 8.00, respectively. Alternatively, it falls to AUD 8.90 using Queensland’s punitive royalty rates.