White Energy (WEC)
Citi – BUY, High Risk, price target $4.10
Southern Cross Equities – BUY
Madison Williams – BUY
Chart: Share price over the year to 05/08/2011 versus ASX200 (XJO)
Stock code: WEC
Charts: White Energy Limited
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Investor Centre: White Energy Limited
With the recent sharemarket volatility, “high risk” is hardly what most investors are looking for. Nonetheless, White Energy Company (WEC) is worth investigating considering the massive premium brokers are attributing to the clean coal company.
After hitting an all-time high of $4.16 nine months ago on 11th October 2010 WEC promptly went into freefall, and by the end of this week it was sitting at less than half that amount – a paltry $1.88. It was the failed A$486m Cascade coal transaction that had been the catalyst for the share price decline, with many investors jumping ship. Although it had been steadily climbing in recent weeks a 13.6% capitulation 10 days ago – making it the third hardest hit stock on the ASX200 – sent it back towards 12-month lows.
Despite the dismal share price performance it should make investors more confident that one of WEC’s directors John Kinghorn has recently doubled his stake in the company, spending $19.2 million to become a substantial shareholder with 6.3 per cent of WEC.
And although the share price has been hammered over the past year and there is a cloud over the future for this clean coal company, the 26.9% jump in just three days a few weeks ago suggests that things are improving; or that there is the possibilty that the company could be subject to a takeover bid.
Knight Capital is of the same opinion. In its report on Emerging Australian Coal Producers it suggests that coal sector consolidation will continue. “We are bullish on the overall coal sector consolidation theme,” it says. “Over the last 3 years, most of the listed independent larger and medium sized coal companies have been taken out or are already in play.” It lists White Energy as one its preferred plays in the coal space, even in the absence of M&A activity. You can read the full report here.
So what is all the fuss about? Well, WEC is the exclusive worldwide licensee of the Binderless Coal Briquetting (BCB), a clean coal technology stgeloped by the CSIRO. According to WEC, BCB is “a low cost mechanical process that upgrades high moisture, low value sub-bituminous and lignite coals through a process of dehydration and compaction. The resultant product is a dense, physically and chemically stable briquette with higher energy content and value which can be handled like normal coal.”
Those brokers that are bullish on the stock have price targets ranging from $3.50-$4.25, a significant premium to the current share price. However each of them place a caveat that the operational issues in Indonesia need to be resolved.
Asit Sen from Madison Williams has a buy on WEC with a price target of A$4.25. “We see underlying value in White Energy’s franchise, particularly given the track record of the ex-Felix senior management team,” Sen writes. “However, the next six months are key, particularly with respect to progress in resolving operational issues at the Tabang facility in Indonesia.” Sen has a fair-value range of A$3.00-A$5.50 but notes that the valuation is sensitive to production ramp up, the discount rate, and margins.
Fleur Grose, Southern Cross Equities also has a buy on WEC, albeit with a lower price target of $3.50. “We believe the technology works and success at the first plant will result in the approval of others,” says Grose. “An upgrade of the coal drying system, the dust extraction system, and the briquette handling and stockpiling systems is due to be completed by September which will allow ramp-up thereafter.” You can read the full report here.
Meanwhile David Haddad from Citi, lists WEC as a high-risk buy, with a price target of $4.10 – down from his previous price target of $5.55. Haddad notes that the failed A$486m Cascade coal transaction has flattened the share price because many saw this “as proof that the binderless briquetting technology did not work and traditional coal assets were needed to fill the gap.” Despite downgrades to his assumptions, Haddad still rates WEC as a Buy, although he notes that it is “High Risk”. “Our NPV of A$8.22 incorporates a slower rampup and higher costs and uses a WACC of 10%,” he says. “Our target of A$4.10 is based on a 50% risk-weighting of NPV, which we believe is appropriate given past challenges with the full-scale plant.” Despite the challenges, Haddad believes that WEC will offer good returns once it beds down the Tabang plant. You can read the full report here.
Based on Thomson Reuters data, three analysts have a buy on the stock, one has a hold, none have a sell.
Citi’s “high-risk” label on the stock shouldn’t be taken lightly. With stockmarkets under pressure and a move away from risky assets, some stocks will most certainly suffer – and WEC could well be one such stock.
That’s not to say that WEC will definitely be hit hard, but as a high risk play there’s every possibility that the share price will slide along with other hopeful miners. Caveat emptor.
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