Should I buy the dip on Whitehaven shares?

A middle-aged woman sits in contemplation over a tablet device considering information about ASX shares and deep in thought.

A middle-aged woman sits in contemplation over a tablet device considering information about ASX shares and deep in thought.

The Whitehaven Coal Ltd (ASX: WHC) share price has dropped 26% since 21 December last year.

After such a significant, rapid drop in the ASX coal miner’s share price, could it make sense to invest in the business?

Firstly, Whitehaven reported its half-year result yesterday. That gives us a good insight into how much profit the company is making.

Earnings recap

Whitehaven reported that for the six months to 31 December 2022, it made $1.8 billion of net profit after tax (NPAT).

The coal miner also reported $2.7 billion of earnings before interest, tax, depreciation, and amortisation (EBITDA), which was significantly higher than the $0.6 billion of EBITDA in the first half of the prior year.

This came with $3.8 billion of revenue, thanks to an achieved average coal price of A$552 per tonne, up from $1.4 billion of revenue and an average price of A$202 in the first half of last year.

It generated $2.5 billion of operating cash flow, up from $567.4 million in the first half last year.

Whitehaven declared a fully franked dividend of 32 cents per share and noted it had bought back around 7% of its issued share capital through its share buyback, which came at a price of $592.8 million.

Its FY23 half-year shareholder payments amount to $641.4 million, representing a total payout ratio of just 36% of half-year net profit.

The just-declared dividend of 32 cents per share amounts to a grossed-up dividend yield of 5.7%.


The Whitehaven share price can also be influenced by the outlook and guidance.

Management pointed out that there is a global energy supply shortfall, particularly for “high-quality thermal coal”. The company expects the rebalancing of global energy demand and supply to take “several years”.

It notes that baseload fuels will continue to be needed, particularly for coal that Whitehaven produces which has a higher energy content and lower emissions profile compared to other coal products.

The lack of Russian coal being sold to Europe and Japan is also providing price support for high-quality thermal coal.

It stated it’s on track to deliver within its guidance ranges of overall production, sales, and cost guidance for FY23.

NSW coal reservation scheme update

Whitehaven also announced that from 1 April 2023 to 30 June 2024, its mines will be obliged to make a certain volume of thermal coal available for domestic power stations. In total, those volumes are capped at the lower of 200,000 tonnes per quarter, or 5% of each mine’s expected saleable thermal coal production.

The required volumes under the scheme are to be made available at a maximum delivered price of A$125 per tonne for 5,500 kcal coal. If the production cost of the delivered coal, plus royalties, and a reasonable margin exceeds the price cap, an application can be made to push the price cap up.

Is the Whitehaven share price a buy?

Whitehaven shares are valued at two times FY23’s estimated earnings and four times FY25’s estimated earnings, according to Commsec. The company could pay a grossed-up dividend of 17% in FY23.

I think it’s highly likely that net profit is going to reduce over the next few years as energy prices normalise. However, the price/earnings (P/E) ratio could be so low that it can achieve market-beating returns if the dividend payout ratio (DPR) is healthy enough.

But, the idea of investing in a business with the prospect of falling earnings isn’t appealing to me.

The post Should I buy the dip on Whitehaven shares? appeared first on The Motley Fool Australia.

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More reading

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia

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