Revenue rose 33% to R466m (H1:13 – R351m), driven mostly by Intibane’s three month contribution and a slightly higher average coal price. Operating leverage lifted EBITDA by 75% and HEPS grew 65% to 11.4cps (H1:13 – 6.9cps).
The Coal Trading segment saw lower volumes squeezing margin and really had quite a dismal trading period. The conclusion of the MacPhail acquisition (still contingent on Competition Commission approval) will likely add significantly to this segment in H2:14E and, especially, FY 15E.
Despite investing c.R51m during the period, the Group was highly cash generative and management sees the potential for further mid-tier coal asset acquisitions as majors continue to dispose of non-core assets from their portfolios.
Our Thoughts: MacPhail Exciting, but Awaiting CompCom Approval
The only outstanding condition for the MacPhail acquisition is the Competition Commission (CompCom) approval.
We have adjusted our forecasts to reflect our anticipated effective date for MacPhail (13 November 2013), assuming the CompCom approves of the deal, and have inserted c.R2m worth of restructuring costs into H2:14 while modelling annual savings of c.R9m being realized from FY 15E onwards.
Downside event risk is if the CompCom does not approve of the merger of Chandler and MacPhail. In this event, our 12m TP would drop by at least c.14cps or c.5%.
Forecast, Valuation and Implied Return: 12m TP Raised 17%
We lift our fair value by 19% to 253cps (previous: 213cps), implying a PE of 15.1x. This PE is not very illustrative, as both Elandspruit and MacPhail are not yet adding to profits.
We raise our 12m TP by 17% to 287cps (previous 12m TP: 246cps), implying a 43% return on an Exit PE of 6.4x.
As Wescoal is a junior miner, we draw your attention to the risks we identify in the body of this report.
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.