|Singapore-listed Golden Energy & Resources has a key subsidiary, 64%-owned Stanmore Resources (SMR) which is listed on the Australian Exchange. Stanmore (A$3.4 billion market cap) produces coking coal, a necessary ingredient in steel production.|
Excerpts from Morgans report
Analyst: Tom SARTOR
Clear growth options and agenda
|• Key CY22 financials easily beat our expectations on higher PCI price realisations.
• SMR enjoys clear M&A advantages in the Bowen Basin and we think positioning for possible acquisitions will far out-rank dividends through 2023.
• SMR looks too cheap trading on a +25% free cash flow yield, with +30% capital upside and upside to tight/buoyant HCC (hard coking coal) pricing.
CY22 result snapshot
▪ Key CY22 financials easily beat our forecasts. Revenue and EBITDA were 2% ahead and operating cashflow 12% ahead helped by higher tax accruals as the
business re-bases to a higher NPAT.
“We think SMR enjoys a clear opportunity to grow its portfolio of world-class, long life met coal assets, as the majors potentially continue to exit coal. SMR bought BMC (80%) well and the Mitsui stake (20%) incredibly well. It enjoys M&A advantages over peers re regional synergies (infrastructure, marketing), proven funding ability and perhaps most importantly, a demonstrated record of deal execution and good custodianship of large assets. It makes sense to us that SMR positions for/ prioritises M&A over internal growth and dividends.”
The lack of a dividend didn’t surprise us, but perhaps disappointed the market seeking a sugar hit. This suggests today’s weakness should prove temporary as fundamentals re-assert themselves.
▪ Anecdotal guidance only: CY23 outlook comments support the potential for flat volumes across the portfolio (100% basis), but with risks linked mainly to above rail capacity (labour constraints).
High inventories and strong volumes late CY22 provide comfort but we assume 10% higher costs on higher strip-ratios and labour.
That said, we do forecast a ~35% lift in attributable production on CY23 on full year and 100% ownership of the BMC assets.
▪ Very tight PCI markets: 2H coal price realisations again surprised our expectations to the upside (>90%), as very tight PCI markets drive pricing at far higher realisations than the LT average of ~73% of the PHCC (premium hard coking coal) price.
We see upside to our (upgraded) CY23 assumed group PCI (pulverised coal injection) price realisation of ~86%.
▪ Clear inorganic growth agenda: We think it’s in shareholders’ interests for SMR to preference de-gearing and the building of M&A firepower over dividends, given:
|1) how successful/ accretive the BMC acquisitions have proven; and
2) our view that SMR enjoys clear M&A advantages in the Bowen Basin (infrastructure, marketing, execution ability, portfolio benefits).
We expect SMR to be an assertive bidder for Daunia, but we have strong reservations should it actively pursue Blackwater given its complexity (product quality, logistics), large rehab liability and history of material cash losses during cyclical low-points.
▪ Organic growth: More detail was offered today, but we think the market still under-recognises SMR’s organic growth options including:
1) higher RMI utilisation (Isaac Downs, third parties?) and
2) potential incremental volumes from Isaac Plains Pit 5/UG, Kemmis North (SWC) and/or Lancewood (Wards Well OC).
Logistics availability appears to be a key ongoing constraint to timing of incremental expansion.
|Forecast and valuation update
▪ We make minor adjustments linked to: CY22 actuals, trimmed CY23 production, higher costs, higher sustaining capital, higher PCI price realisations and higher short-term HCC pricing resulting in 2-4% upgrades to EBITDA across CY23-24.
▪ Our base case valuation/target adjusts to $4.80ps (from $4.75ps).
▪ SMR looks far too cheap trading on a +25% free cash flow yield and offering +30% upside to our base case valuation. We’re attracted to
▪ Higher HCC pricing driving market recognition of SMR’s large cashflow leverage.
▪ Progress on inorganic growth options as above.
▪ Further accretive M&A activity.
▪ Production disruption, cost inflation, logistics interruption/ availability.
▪ Ill-disciplined M&A.
Full report here.