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Stock: Coal & Allied

Stock code: CNA

Share Price: $91.00 (as at close on Friday 5th August 2011)

P/E Ratio:  13.07 (Sector P/E 17.78)

Market Cap: $8,207,000,000

Broker Calls

Perpetual Concentrated Equity Fund – BUY

Citi – BUY

Deutsche – BUY, Price target $126.00

UBS – BUY

Credit Suisse – OUTPERFORM

 

 

Chart: Share price over the year to 05/08/2011 versus ASX200 (XJO)

Stock code: CNA

Charts: Coal & Allied Limited

More news: Coal & Allied Limited

Investor Centre: Coal & Allied Limited

Brokers continue to be bullish on coal, and more specifically on Coal & Allied (CNA). Deutsche has a buy recommendation on the stock, with a whopping $126.00 price target – a 38% premium to the current share price.

As the global economy expands, so does the demand for coal. Coal is used for electricity generation, steel production, cement manufacturing, liquid fuel, fertilisers and also as a by-product for aspirin, soaps, plastics, fibers and so on. All of the above make coal an omnipresent resource. And its future appears to be safe: China plans to build 500 coal-fired plants over the next decade or about an electricity plant per week.

Rio Tinto-majority owned Coal & Allied (CNA) is on this wave. It recently achieved a 25% surge in first half revenue due to higher production and strong prices. Revenue for the six months to June amounted to $1.165 billion, compared to $929 million for the previous corresponding period. Reported net profit was just $227 million, down 54% from $498 million for the first half of 2010, however excluding divestments, the net profit result was in fact up 41%.

‘Coal & Allied’s profit in the first half of 2011 was solid, driven by an increase in production despite continued weather impacts,’ managing director Bill Champion said. ‘While we lost 20% of calendar time in June due to wet weather, Coal & Allied produced a strong second quarter, leading to an 11% increase in saleable production compared to the first half of last year.’

Champion said strong coal prices were expected to continue for the remainder of the year. ‘We will increasingly see these higher prices flow into revenue as contracts are renewed,’ he said. ‘Following the devastating natural disasters in Japan there has been a moderate reduction in demand, however we are not expecting any ongoing impacts on our sales volumes.’

Description

After 150 years in the Hunter Valley region of New South Wales, CNA – majority owned and managed by resources giant Rio Tinto – is undoubtedly one of the major coal producers in the region, employing more than 1,500 people across three operations.

The share price of Coal & Allied has risen over 300% since 1 January 2003. However after hitting a high of $130 back in January this year, the share price has performed poorly along with the rest of the sharemarket, falling by more than 30%  in the past 6 months alone.

The big risk for Coal & Allied is the high Australian dollar, which is impacting earnings. The company suffered a $221 million drop in total revenue compared to 2009 due to the strengthening of the Aussie dollar against the US dollar. In its annual report, management blamed the high Aussie dollar on more than offsetting the increase in underlying US dollar thermal and semi soft coking coal prices for the year, seriously impacting its bottom line.

CNA’s current projects include the Mount Pleasant, Lower Hunter Lands, Hunter Valley Operations South and the proposed Warkworth Extension.

Its Hunter Valley operation is a multi-pit open cut mine, producing 11 million tonnes of thermal coal and semi-soft coking coal per annum for international markets. The company also operates Mount Thorley Warkworth and Bengalla.  In addition to its mines, CNA also has investments in rail wagons, coal loaders and land across the region.

Financials

Revenue for the six months to June amounted to $1.165 billion, compared to $929 million for the previous corresponding period. The company declared an interim dividend of $1.20 per share, fully franked, compared to a dividend of $4.50 in the first half of last year.

As stated in the company’s financial reports: ‘Profit after tax for the 2011 half year of $227 million is a 54 per cent decrease from the corresponding period in 2010 ($498 million). The 2010 half year result included a gain on divestment of the Maules Creek and Vickery Coal Projects of $337 million. Profit after tax, excluding divestments, for the 2011 half year of $227 million is a 41 per cent increase from the corresponding period in 2010 ($161 million). This was due to an increase in revenue through increased sales volumes and a higher realised US dollar price for coal offset by the detrimental effect of the stronger Australian dollar. An increase in production costs, largely associated with the increased volumes, has also impacted earnings.’

Financials  :

 

2008A2009A

2010A

 Sales Revenue ($m)

 2649.8 2292.02080.2

 EBITDA ($m)

 1,248.0 900.2 762.8

 EBIT ($m)

 1148.60 781.70 643.90

 Reported NPAT ($m)

 803.8 585.5 366.6

 Price/Earnings

 10.4 12.0 22.9

 Dividend Yield (%)

 8.4 6.4 4.9

 Net Profit Margin (%)

 30.3 25.6 17.6

 ROE (%)

 54.139.0 24.2

 Net Debt/Equity (%)

 -35.2 -19.5 -9.7

Link to company Earnings Report: Half Year Earnings Report – to December 31st, 2010

Outlook

In its half-year report CNA says that it achieved a solid result in first half 2011, driven by increased production despite weather impacts. It believes it is well positioned to deliver ongoing growth and will see increasing production into 2012 from significant investment in overburden removal, and strong market conditions.

In terms of thermal coal, although the first half was challenging, it says that China has reentered the market, Japan is getting back on track and the thermal coal market is forecast to grow by around 3%. ‘The outlook for the rest of 2011 is steady, with improved Australian supply matching the demand outlook,’ it says.

And for semi soft, although Newcastle exports of metallurgical coal in the 6 months to June were down by 16% and CNA shipments were down 13%, it believes that ‘the expected growth in steel demand over the next few years, especially in Asia, will continue to drive demand growth in semi soft.’

Analysts’ views

Brokers continue to be bullish on coal, and more specifically CNA. Better than expected production results for the first half have led to Credit Suisse upgrading the coal miner from neutral to outperform. Likewise UBS has upgraded the Hunter Valley coal miner, although it is more bullish than Credit Suisse, placing a buy on the stock.

Meanwhile Citi also has a buy on the coal miner, saying that the company’s massive capex commitments over the past year and a half are starting to pay dividends. Likewise Deutsche has a buy, with a whopping $126.00 price target – a 38% premium to the current share price.

Perpetual Concentrated Equity Fund is another buyer of CNA. “Coal & Allied has sound management, quality assets and continues to benefit from growing global demand for coal,” it says.

Based on Thomson Reuters data, 5 analysts have a buy on CNA, 3 have a hold and 0 have a sell.

Conclusion

Despite the wild volatility seen over recent weeks and the fears surrounding the global economy, we’re yet to hear bad news out of Asia – and it’s Asia’s demand that is driving Australian coal companies. If Asia continues to grow strongly (this is not guaranteed), CNA is set to gain and any current share price weakness may present an attractive entry point.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.