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Whitehaven joins spray-on-skin maker in Best Ideas list

Lex Hall  |  03 Feb 2020Text size  Decrease  Increase  |  
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Low coal prices have helped Whitehaven Coal join spray-on skin maker Avita Medical in Morningstar’s Global Best Ideas list for February.

Whitehaven Coal (ASX: WHC) is trading more than 30 per cent below the fair value estimate set by Morningstar equity analyst and director Mathew Hodge.

Avita Medical (ASX: AVH) is trading around 25 per cent below the fair value estimate set by Morningstar equity analyst Nicolette Quinn, who began coverage of the stock last week.

Whitehaven discounted amid low coal price

The fair value estimate for Whitehaven is $3.80. The stock was down by about 3 per cent on Monday as stocks were buffeted by fears around the coronavirus.

However, Hodge attributes the circa 30 per cent discount for WHC to the prevailing low price for thermal coal, which is used to generate electricity, cyclically weak demand and some switching to gas because of a current glut of LNG.

Margins have also shrunk because of production disruptions at Whitehaven’s two most valuable mines: Narrabri and Maules Creek, in northeast NSW.

Narrabri was hit by an eight-week break in underground production with the refurbishment and relocation of the mining equipment. Maules Creek was disrupted by labour shortages, as well as dust and smoke from the bushfires and drought.

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The real risk is related to ESG – or environmental, social and governance concerns, Hodge says. Australian banks have reduced financing for thermal coal mining, which follows the decision by fund giant BlackRock to also cut its exposure to thermal coal companies.

Australia is one of the world's biggest coal exporters, shipping about $30 billion of thermal coal a year, and Hodge expects demand from Asia to grow modestly, offsetting weakness in Europe and the US.

We see margins improving as the coal price recovers to our longer-term assumption of $73 per metric ton and as cost-reduction initiatives and a recovery in volumes lower unit costs.

“We acknowledge the potential environmental, social, and governance risk around coal mining, particularly the 70c per share of our valuation attributed to the undeveloped Vickery and Winchester South deposits, but we believe significant risk is already factored into the price.

“In the scenario where social licence for building new coal mines is lost, we would expect some benefit from higher prices due to the restriction on supply.”

Ups and downs: Whitehaven Coal's price 

Whitehaven Coal 3-yr chart

Source: Morningstar

Avita Medical: skin in the game

Avita Medical develops and distributes regenerative products for the treatment of a range of wounds, scars, and skin defects.

Avita’s lead product, ReCell, is used in the treatment of a variety of burns, plastic, reconstructive and cosmetic procedures. The company operates in the Asia Pacific, the Americas, Europe, the Middle East and Africa.

“What sets ReCell apart from existing and new therapies is the speed at which it is able to create its Spray-on-Skin to apply to the burn site, as well as attractive pricing,” says Quinn.

ReCell has approval in the US for the treatment of second- and third-degree burns in adults, and Quinn sees potential for Avita to boost its market penetration in the next five years. It is expected to launch paediatric trials in fiscal 2022.

“While the company is currently loss-making, we forecast Avita to be profitable from fiscal 2022 and revenues to grow to $640 million by 2029.

“We expect the high forecast uncertainty is the likely reason for the market currently undervaluing Avita, but the latest results suggest approximately 20 per cent market penetration one year into commercial launch which affirms our longer run expectations of the product potential.”

Avita was up about 5 per cent in a sluggish market on Monday. It has a fair value estimate of 95c.

There are 11 Australian names in the Morningstar Global Best Ideas list. See the full selection here Prem Icon Morningstar Global Best Ideas list for February.

VIDEO: How does Morningstar choose its Best Ideas?

 

is senior editor for Morningstar Australia

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