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.
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).
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.