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PREVIOUS ARTICLE 18 Share Tips - 21 March 2011

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Top Gainer: Macarthur Coal (MCC)

 Closing price $4.06
 Change +4.06
 % change +36.6%

 

It took a stellar performance by Macarthur Coal (MCC), which soared after it received a second takeover offer, to prevent Energy World from taking out the top gainer’s spot for the second day running. While Energy World shares jumped 8.0%, MCC shares rocketed on the back of a joint $5 billion takeover offer from the biggest US coal miner Peabody Energy Corp and the world’s largest steel maker ArcelorMittal.

Macarthur Coal, the world’s largest producer of low volatile pulverized coal injection coal product used for steel making, jumped $4.06, or 36.64 per cent, to $15.14. Other miners joined in on the rally, with Gloucester Coal adding 33 cents to $8.76, New Hope rose eight cents to $5.23 and Whitehaven Coal was up 17 cents at $6.27.

Austock’s Michael Heffernan said coal stocks bucked the trend on the back of increased confidence from the $4.7 billion takeover bid. “It’s quite ironic as coal stocks were expected to be hit hard by the carbon tax, yet they’re the better performers than their other resource counterparts,” Heffernan said. Prime Minister Julia Gillard has hailed the takeover bid as proof her carbon price package won’t kill off the sector.

Paterson Securities resources analyst Andrew Harrington had a buy on the coal miner last month when he said that it was a takeover target. MCC operates two mines in the Bowen Basin and plans to double its 2009 production capacity by 2014 through the development of the Middlemount Mine project, plus an additional mine from its extensive project portfolio. “MCC is regarded by many as providing excellent leverage to a recovery of coal production to meet steel market demands through LVPCI coal demand,” says Harrinton. “Wet weather disruption means full year 2011 sales amount are likely to be at the lower end of its 4.1-4.3 Mt.” 

Coal exports during the March quarter took a hefty whack after Queensland’s recent ‘big-wet’ – but the clouds that caused havoc to many coal-plays may have a silver lining.

Admittedly, the knock-on effect of the disrupted coal supply from Australia did cause a short-term rally in prices. While this did defer orders from several major importers, demand now looks set to reassert itself on the market as prices ease and supply/demand fundamentals only reaffirm a robust outlook for the sector at large.

A recent coal report by Wood Mackenzie expects the 28 projects within its coal supply research to contribute 157 million tonnes of marketable coal annually by 2023 – with thermal coal for export representing around 60 percent. Indeed, more countries will move to develop their coal assets – especially thermal – but to their benefit, most local producers tend to be low-cost operators.

Much of the positive outlook for the sector is wired to greater dependence on thermal coal from Japan, India and China. Australia is also an important source of coal for South Korea, providing 32 percent of its thermal, 30 percent of anthracite and 56 percent of coking coal imports.

The recommissioning of coal-fired power stations – to cover some of the power short-fall left by nuclear plants no longer operating – is expected to add an extra kicker to demand from Japan. Meantime, growing electricity demand in China and India – which together take around a quarter of Australia’s total production of coking coal – also places greater pressure on power utilities, where stockpiles have needed replenishing ahead of current high demand season.

In just 10 years China has gone from an exporter of 90 million tonnes of coal to an importer of a corresponding amount. According to Neil Dhar executive vice president of trading house Noble Group, attempts to feed their rapidly growing power industries could see China’s thermal coal imports rise from around 90 million tonnes in 2011 to 200 million tonnes (Mt) in 2015. India’s thermal imports are also expected to rise to more than 100 million tonnes by 2015, from around 67 million tonnes this year – then double again by 2024.

Based on tight supply, Andrew Pedler analyst with Wilson HTM expects coal prices to rise on average 30 per cent in 2011, in line with the 30 per cent gains in 2010 – with the price of hard coking and thermal coal reaching US$277.5/t and US$130/t respectively.

At US$130/Mt, miners can make healthy margins on thermal coal, but in anticipation of any longer-term price weakness, Pedler says investors should identify low-cost producers than can still turn a profit or justify bringing on new mines – should prices head south towards the US$90/Mt threshold.

While the US has mopped up coal shortfalls experienced in recent months, their ability to expand past these levels – especially given their existing infrastructure – look doubtful. As a result, growing demand is expected to see Qld and NSW coal terminals reach their capacity both this year and into 2012 – and this suggests a potential upside for FOB prices over the next financial year.

Due largely to recent market volatility – plus lingering uncertainty over carbon tax, and the proposed MRRT tax – the rush for assets many were expecting never eventuated. But with small and mid-tier operators now looking ripe for takeover at current levels, Rod Buckton coal sector analyst with BGF Capital said last month that he didn’t think an upturn in M&T activity is too far away. He wasn’t wrong.

Given the growing global competition, especially amongst thermal coal exporters, Buckton said Australia’s low-cost high-energy coals will become more desirable. He mentioned the fact that most coal stocks are acquired for a 30 per cent premium over the share price shouldn’t be lost on investors.

According to Thomson Retuers broker consensus data, 2 brokers hold Buys on MCC, 2 Outpeforms and 7 have Holds, with just two Sells.

 

Chart: Share price over the year to 12/07/2011 versus ASX200 (XJO)

Stock code: MCC

Charts: Macarthur Coal Limited

More news: Macarthur Coal Limited

Investor Centre: Macarthur Coal Limited

 

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Biggest Loser: Virgin Blue (VBA)

 Closing price $0.31
 Change -0.03
 % change -8.8%

 

After soaring last week Virgin Blue came back to earth this week, with the share price shedding 8.8% today on the back of yesterday’s 2.9% tumble to be the day’s biggest loser. VBA shares had soared as rival Tiger Airways was grounded by CASA, taking its gains last week to a whopping 21%, but the release of carbon tax details over the weekend has wiped out much of those gains.

The federal government has proposed charging Australia’s 500 biggest companies $23 per tonne of carbon emitted, from July next year. VBA said the carbon plan would result in a $45 million hit in 2012/13, based on current domestic fuel consumption, although it said it was too early to forecast the impact of the carbon plan on passenger demand.

While some industries would receive financial assistance in light of the new scheme, domestic airlines “will not have access to transitional assistance or compensation arrangements” because international aviation fuel was not included in the carbon price scheme.

The Centre for Asia Pacific Aviation (CAPA) said airlines positioned at the business end of the market had less exposure to the carbon tax than those focused on the price-sensitive end of the market. “In other words, Qantas has less to fear than Virgin Blue, which in turn is better positioned than Jetstar and Tiger Airways, whose business models are highly sensitive to fuel price fluctuations and operate on thinner margins,” CAPA said in a research note on Monday.

Virgin Blue’s share price had been in a tailspin since the beginning of 2008, when it was sitting at just under $2.00, 10% below its December 2003 listing price of $2.25. Although at that point it was already down 30% from its record high of $2.78 in early 2007, the worst was yet to come for investors. Amid the GFC and a raft of profit downgrades in the first 6 months of 2008 VBA lost 75% of its value to just 28 cents and has never recovered. This calendar year alone the share price has haemmoraged, dropping 30% since Jan 1 to be languishing at $0.345 even with today’s 9.5% jump and Monday’s 10.5% leap.

Most of the 30% fall since January has occurred since the half yearly report and accounts were released to the market on 23rd February. Although Virgin Blue CEO John Borghetti tried to convince investors that it was “a very solid result” it seems they didn’t buy his rhetoric, with shares tumbling 10% over the next few days and 22% in the eight weeks after results were announced.

Monday’s news that Tiger Airways would be grounded was welcomed by investors, with the stock already up 21% this week. The grounding of Tiger Airways Australia – which has been a thorn in the side of Virgin – will cost the airline $1.5 million a week, the airline’s parent company says.

Analysts say the Civil Aviation Safety Authority’s (CASA) suspension of Tiger Airways has put the future of the airline’s four-year-old Australian operations in doubt. CASA decided to take Tiger’s 10 Airbus A320 aircraft out of Australian skies on Friday night (AEST) as it believed the airline posed a “serious and imminent risk to air safety” if it continued flying. It was the first time the air safety regulator had suspended an entire airline’s operations, with the only comparable action the grounding of Ansett’s Boeing 767 fleet in 2001. Ansett collapsed six months later.

Credit Suisse research analysts Anthony Moulder and Nicholas Markiewicz expressed doubts about Tiger’s viability in Australia. “While management cite the earnings diversity for continuing to operate in Australia, we believe this a poor justification of Australian operations,” the pair wrote in a research note.

Mr Moulder said Virgin had most to gain from any withdrawal, given its flights overlapped most with Tiger.

Sean Conlan, Macquarie Private Wealth believes Virgin offers significant upside if it executes and delivers on its strategy. However, the macro environment is still challenging. The Delta Airlines alliance was one of the notable outstanding moves. With this deal now in place, management can focus on rounding out the virtual global network by the end of the year, and it should be in a stronger position to approach potential partners to associate with the airline’s loyalty program.

Intersuisse’s Cameron Bell has a sell on VBA, saying that the airline has experienced a tough run recently and that he doesn’t expect things to improve anytime soon. “Competitively, it’s struggling against Jetstar and even Qantas…the sector remains under pressure given the lacklustre domestic travel market and high oil prices.”

All in all, 2011 is shaping up as yet another tough year for Virgin Blue, with the company expecting “challenging” conditions over the second half. Natural disasters and soaring fuel costs forced Virgin Blue Holdings Ltd to issue another earnings downgrade a few months ago, its fourth in just 12 months. It announced that it expected to post a before tax loss for 2010/11 in a range between $30 million to $80 million assuming “no further significant increase in fuel prices and no material deterioration in the trading environment.” In more bad news for Virgin, oil prices have increased a further 10% since that announcement.

Whether at the high or low end of expectations, this is well below the $33.4 million pre-tax profit recorded in 2009/10.

But not all analysts are bearish. According to broker consensus data, 2 brokers hold Buys on VBA, 3 Outpeforms and 5 have Holds, with just one Sell. The highest 12 month price target is $0.46, and the lowest 12 month price target is $0.33. The average 12 month price target is $0.396.

 

Chart: Share price over the year to 12/07/2011 versus ASX200 (XJO)

Stock code: VBA

Charts: Virgin Blue Australia Limited

More news: Virgin Blue Australia Limited

Investor Centre: Virgin Blue Australia Limited

 

Each trading day we will look at the top gainer and biggest loser for the day. Note that these are not recommendations to buy or sell, although we do include broker views on these stocks in the article.

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