Tag Archives: equity research

Wescoal Holdings – H1:15 Results – Big Strides Forward

H1:15 Results Note – Share Code: WSL – Market Cap: R380m – PE: 12.4x – DY: 2.0%

Download Wescoal Holdings H1:15 Results Note

H1:15 Results: Strong Results

  • Wescoal reported its H1:15 results with Revenue rising 93% boosting Operational EBITDA (which excludes once-offs) to R84m (H1:14 – R49m) and HEPS grew by 33% to 15.2cps (H1:14 – 11.4cps).
  • The Group also concluded a financing agreement for its Elandspruit mine, acquired the Muhanga plant, added an extension to both Intibane and Khanyisa’s Life of Mine (LoM) and integrated MacPhail into its Coal Trading segment.

Our Thoughts: Big Strides Forward, Underrated Trading Business

  • The successful acquisition and integration of MacPhail into the Group’s Coal Trading segment now makes this enlarged business the largest coal trader in South Africa. We do not believe that this dominant position’s value is fully appreciated by the market and see significant (though hard to value) upside coming from this base.
  • The timing and ultimate profitability of Elandspruit, though, will still have a significant impact the Group’s future. We have assumed that its Water Use License (WUL) is issued during December 2014 and mining starts in the first month of FY 16E.

Forecast, Valuation and Implied Return: Under Appreciated

  • We raise our fair value by 5% to 254cps (previous: 240cps), as the various Group projects de-risk, the mine extensions add uplift and MacPhail synergies are increasingly realized.
  • The implied PE of 13.0x is not very illustrative, though, as Elandspruit is currently adding to our valuation, but not yet contributing to the Group’s profits.
  • Based off this fair value, we keep our 12m TP flat at 294cps (previous 12m TP: 301cps), implying a 51% return on an Exit PE of 10.0x, though with plenty of up- and downside risks attached.
  • Note the numerous key risks to our view hereon at the end of this report given the junior mining status of the stock.

Download Wescoal Holdings H1:15 Results Note

See our methodology here and note our disclaimer here.

Wescoal Holdings – FY 14 Results Note – Positives Dampened by Eskom

FY 14 Results Note – Share Code: WSL – Market Cap: R374m – PE: 12.9x – DY: 1.3%

Download the full Wescoal Holdings FY 14 Results Note

FY 14 Results: Once-off Costs Create Earnings Miss

  • Wescoal reported its FY 14 results with revenue rising 70% to R1.1bn (FY 13: R0.7bn), largely driven by the H2:14 inclusion of the MacPhail acquisition into the Group’s Coal Trading segment.
  • Excluding the once-off profits on the sale of mineral assets during the period, the Group recorded an “Operational” EBITDA growth of 124% and HEPS rising to 15.7cps (FY 13: 12.4cps),
  • While the Group’s revenue slightly surpassed our forecast of R1.0bn, restructuring and relocation costs in the Coal Trading segment (R6m), intangibles amortisation (R2m), higher than expected costs and a more aggressive rehabilitation programme at Khanyisa and a general dip in Eskom-related volumes of coal collectively saw the Group miss our target HEPS of 21.2cps.

Our Thoughts: Uncontrollable Eskom and Spot Price Variables

  • The Group has identified mine extensions for Khanyisa and Intibane while Elandspruit is progressing well towards an expected first production during January 2015.
  • MacPhail is integrating well into the Group’s Coal Trading segment and the enlarged business’s prospect look positive.
  • Two key variables that will determine the Group’s short-term prospects are (1) Eskom-related coal volumes, and (2) the Rand-price of inland coal. Both variables were soft during FY 14E and—while hard to forecast—indications point to upside here.

Forecast, Valuation and Implied Return: Relatively Flat Update

  • We lower our fair value by 5% to 240cps (previous: 253cps), as the time value of money has been offset by a lower spot coal price and slightly lower Eskom volumes.
  • The implied PE of 15.3x is not very illustrative, though, as both Elandspruit and MacPhail are currently adding to our SOTP, but not yet (fully) contributing to the Group’s profits.
  • Based off this fair value, we marginally raise our 12m TP by 4% to 301cps (previous 12m TP: 287cps), implying a 48% return on an Exit PE of 12.2x (which still would not include a full year’s steady-state contribution from Elandspruit).

Download the full Wescoal Holdings FY 14 Results Note

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See our methodology here and note our disclaimer here.

Wescoal: An Overlooked Coal Junior With Exciting Prospects

Initiation of Coverage – Share Code: WSL – Market Cap: R239m – PE: 11.1x – DY: 2.2%

Download Wescoal Holdings Initiation of Coverage Report Here

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.

 

Download Wescoal Holdings Initiation of Coverage Report Here

What do you think of Wescoal? Please send us a mail with your view of the Group…

See our methodology here and note our disclaimer here.

About Blue Gem Research (Pty) Ltd

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A structural bottleneck in the South African equity market is the reality that sell-side analysts are incentivized via allocation, trade volumes and related brokerage to cover large, liquid stocks. While this can add value to the market, the law of marginal diminishing returns implies that it adds less and less value as more and more analysts cover the same finite number of stocks (i.e. the Top 40 index on the JSE).

Even the few analysts covering stocks outside this Top 40 index are inadvertently pushed to cover the more liquid counters in this universe in order to effectively monetize their research through the related, generated and allocated trade.

The irony is that the very stocks that would benefit the most from being professionally researched are the very stocks that are also marginalized by these sell-side economics: the dynamic, growing, exciting small cap counters that fall just off this radar.

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