Coin toss

RESULTS ANALYSIS

Need To Know

• Net cash $2.65bn after returning $949m to shareholders in FY23.
• Buyback suspended while options are considered.
• Thermal coal pricing still looking good as winter arrives in the north.

Investment Implications

FY23 results overview (vs consensus):

Revenue $6,086m vs $6064m

EBITDA $3,985m vs $3,966m

Net profit $2,668m vs $2,620m

A phenomenal year for WHC as it banked the benefits of an average achieved coal price that was 37% above last year. The bonanza has completely changed the fortunes of the company which now ponders what to do with the $2.77bn cash on its virtually debt-free balance sheet. Note that WHC has to pay $889m of tax in FY24 based on its FY23 profits and $337m of the cash pile is for the final dividend. That still leaves net cash of $1.4bn. We point out that WHC now has $402m of franking credits available to support its dividend payout policy of 20-50% of net profit through dividends and buybacks.

The company repurchased ~120m shares at an average price of $7.93 per share in FY23 but still has about the same number of shares to repurchase in order to complete the current buyback. Instead, the company has called a halt to the buyback in order to assess its capital framework ‘in light of growth opportunities’. That is entirely reasonable but may disappoint some shareholders who had anticipated the full buyback being completed before other decisions were made. In fairness, the opportunity to consider the BHP mines that are for sale was not in the picture at the time the second buyback was announced. The hiatus will possibly cast a shadow over the stock price until some certainty is revealed.

Unit cost of production has been rising quickly through FY23 to $103/t and is going higher in FY24. The main culprit is higher diesel and labour costs.

WHC is pushing on with its Vickery Coal extension project near Gunnedah in NSW. First production is due in mid-CY24 and will deliver very high CV (calorific value) thermal coal with low ash content. Capex of $150m is allocated to the project with $34m spent in FY23. Total group capex in FY23 amounted to $307m.

Thermal coal prices have been reasonably good following the slide from the peak of US$453/t in September 2022. The northern hemisphere is preparing for winter again and Newcastle index prices have been perky at US$129/t in June and heading to US$150/t in August.

Investment View

WHC’s balance sheet is chockers, and it seems the investment bankers have paid CEO Paul Flynn a visit to see what he wants to spend all that cash on. BHP just happens to have two coal mines up for sale that might fit with WHC’s portfolio (and fatten bankers’ pockets), WHC is now considering its options while temporarily suspending the buyback.

With the mild annoyance of rising unit production costs, WHC’s near term earnings outlook is still quite promising given the lift in coal prices once again.

The elephant in the room is how the Board will decide to deploy the windfall profits of FY22 and FY23. Investors will hopefully not have to wait too long, but it will be tempting to find a new asset from which to generate future earnings.

Until that decision is finalised, we retain our Hold recommendation.

Figure 1: WHC EBITDA factors