Initiation of Coverage – Share Code: WSL – Market Cap: R239m – PE: 11.1x – DY: 2.2%
Business Overview: Coal Miner with Strong Coal Trading Operations
- Built out of long-established coal-trading operations, Wescoal has moved into thermal coal mining for supply to Eskom.
- The Group has built a portfolio of valuable short- to medium-life coal deposits that are mostly either in or near to production.
- Khanyisa was previously the only producing mine, but Intibane began production during June 2013 and will contribute to FY 14E. The larger, longer-life mine, Elandspruit, is planned for FY 15E.
- The Group has also recently conditionally acquired a large competitor in the coal trading space.
Key Issues: Inland Coal Price and Inland Coal Market Dynamics
- The inland coal tends to track international coal prices, which have been under short-term spot pressure as softer global markets attempt to absorb increasing USA exports.
- A looming 2015 supply deficit to Eskom creates risks of regulatory intervention in South Africa’s inland coal market.
Forecast, Valuation and Implied Return: Highly Sensitive to Coal Price
- Our forecasts are heavily influenced by the assumptions underpinning the timing, efficiency and rate of Wescoal’s new coal mines; critically, Intibane in the short term (from FY 14E) and Elandspruit in the medium term (from FY 15E).
- Our SOTPs on Wescoal arrives at a fair value of R367m or 213cps, 54% more than the current share price on an implied PE of 18.6x of historical earnings. This implies a fair value of c.R10 per ton of in situ coal for the Group’s mining assets (c.218cps per WSL share) with a further R56m or 33cps fair value from the Group’s Coal Trading segment. We have taken out a 20% Group discount for overheads and corporate costs.
- Rolling forward all the fair values at our Cost of Equity (19.2%), we arrive at our 12m TP of 246cps for Wescoal on an Exit PE of 10.6x, implying an attractive 78% return.
- As a junior coal miner, our valuation of Wescoal is based on the assumption of a flat spot coal price. A sensitivity analysis of our models sees our fair value changing by between 10cps to 13cps for every 1% change in the assumed coal price.
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