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Coal comfort or the clear air of covid

Lex Hall  |  19 Sep 2020Text size  Decrease  Increase  |  
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Earlier this month, at 2.46pm on 4 September to be precise, a 3-page document appeared on the ASX website, informing the market that Paul Flynn, the chief executive of Whitehaven Coal, had made a modest boost to his pile of shares. On the day, Whitehaven was trading at about 85 cents—pretty much base camp if you look at the company’s share price chart.

Whitehaven reported in late August, and the news wasn’t great: earnings were down about 69 per cent on the previous year as bushfires, drought, flooding and then covid mucked things up. And while coal may not be the ESG sector of choice, Whitehaven is making progress in certain environmental, social and governance aspects. Its safety record has improved, and it has honoured its pledge to give jobs to indigenous people, who currently represent about 9 per cent of its workforce. Its high-quality coal, which is used in electricity generation and steelmaking, is shipped to customers across Asia, with the notable exception of China. Flynn of course acknowledges the ESG risks of coal, and the fact the company’s environmental performance has been found wanting. Just yesterday he announced that compliance in this area will play more of a role in governing his pay.

Whitehaven figures on the Morningstar Best Ideas list and is trading at a more than 70 per cent discount to the $3.30 set by Morningstar resources analyst Mat Hodge.

The discount reflects a few factors, Hodge says—namely, the low prevailing thermal coal price of about US$50, which is a function of recent supply additions, cyclically weak demand, and some switching to gas, given the glut of LNG and oil. “We see margins improving as the coal price recovers to our longer-term assumption of US$74 per metric ton from fiscal 2022 and as cost-reduction initiatives and a recovery in volumes lower unit costs.” We spoke to Flynn this week and will publish the discussion in coming weeks. In the meantime, you can read more of Hodge’s assessment here.

Whitehaven Coal (WHC) - MAX

A chart showing the share price movement of Whitehaven Coal WHC

Source: Morningstar Premium

And while we’re on ESG, consider these words from Tim Samway, chair of Hyperion Asset Management, who spoke at Pinnacle Investment Summit this week. “Isn’t it interesting in recent years an awful lot of asset owners are starting to focus on products that kill their consumer, the customer, tobacco; that kill the environment, coal; that kill other people, munitions. We’ve considered those uninvestable since inception,” Samway told Morningstar’s Andrew Miles, who moderated the discussion.

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“The winds are changing. People with real, large amounts of money are saying, you can’t do this anymore. Where does it go from here? Well, we think it should go to sustainability of earnings. That’s what it’s like. Tobacco, we think in the very long-term, you just kill off all your customers. That’s not a sustainable business. And coal won’t be either … and covid has focused people’s minds on what clear air feels like.”

Hyperion manages about $7.2 billion (as of February 2020), mostly for institutional clients. You can read Morningstar’s take on it here.

In Firstlinks this week, Graham Hand ponders the popular method of valuing companies by judging them against the prevailing interest rate. Following this logic, “does it follow that when interest rates are as low as they are at the moment, companies become more valuable?” Hand writes. “Perhaps, but only if the cash flows remain unchanged, and in a recession, future earnings are more difficult to sustain.”

Hand also hears from Martin Conlon, head of Australian equities at Schroders, who argues the disconnect between stock prices and economic reality has become a giant Ponzi scheme in a casino-like market.

Elsewhere, we talk to Morningstar equity analyst Seth Goldstein about the future for electric vehicles and pull over the stocks that are set to benefit.

Susan Dziubinksi unearths four wide-moat stocks with low uncertainty ratings—a useful combo for the uncertainty at the moment.

Holly Black speaks to Premier Miton's Simon Evan-Cook, who argues the tech rally of 2020 is reminiscent of the dotcom boom, but inflation could be a bigger threat.

Afterpay is too hot to hold because it lacks earnings sustainability and the barriers to entry in the sector are increasingly brittle, Greencap’s David Pace tells Emma Rapoport.

Reaching financial prosperity can start by you becoming the hero of your own financial narrative, writes Morningstar’s behaviour finance specialists Sarah Newcomb and Samantha Lamas.

And finally in Your Money Weekly, equity analysts Adam Fleck, Mathew Hodge and Johannes Faul answer some of the thorniest reader questions. “Do moats matter?” “Does the divergence between the stock price and the fair value estimate imply that you’re wrong?” Sound questions. See the answers here.

 

Visit Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

is senior editor for Morningstar Australia

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