Whitehaven’s share price is up 36% in a month. Why Morgans predicts more “supercharged returns”

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the Whitehaven Coal Ltd (ASX: WHC) share price has outperformed in the past month, rising 36.5%.

It has significantly outperformed S&P/ASX 200 Index (ASX:XJO), which has fallen 1.76% in the same period.

What has caused such a large outperformance of Whitehaven shares?

With energy prices soaring around the world, coal is benefiting as countries try to keep their power grids fueled. This includes using more charcoal.

The ASX Coal stock recently reported its FY22 result, which showed how much the company is profiting.

Fiscal Year 22 Earnings Summary

In the 12 months to June 30, 2022, the coal miner generated record revenue of $4.9 billion (up 216%) thanks to an average coal price of A$325 per tonne. This compares with revenue of $1.56 billion and an average price of AU$95 per tonne in FY21.

Its earnings before interest, taxes, depreciation and amortization (EBITDA) soared 1,396% to $3.06 billion.

Whitehaven made $1.95 billion of net profit after taxes (NPAT). This compares to an underlying net loss of $87.3 million in FY21.

Operating cash flow soared 1,423% to $2.58 billion.

ASX stock has also been conducting a $550 million market share buyback. Whitehaven’s board will seek shareholder approval to increase the buyback at the company’s annual general meeting (AGM) in October.

It also decided to pay an all-out-of-pocket final dividend of 40 cents per share. At Whitehaven’s current share price, that dividend alone represents a gross dividend yield of 7.2%.

Dividends and FY22 share buybacks represent a total payout rate of 51% of FY22 net income, in line with company policy.

Why are coal prices so high?

Whitehaven CEO and Managing Director Paul Flynn explained:

Long-term underinvestment in energy sources needed to supply baseload capacity to growing populations and economies has contributed to a widening gap between supply and demand. In FY22, we saw global energy shortages intensify as a result of the tragic conflict in Ukraine and associated sanctions against Russian coal and gas.

Coal prices are at record levels and customers are focused on energy security now more than ever.

Demand for high quality seaborne steam coal is expected to remain strong through FY23 and high CV coal prices should continue to be well supported.

To take advantage of this, Whitehaven expects to generate higher coal production and sales in FY23 compared to FY22.

The company noted:

It is likely to be several years before additional supply or alternative energy sources become available to rebalance the global dynamics of supply and demand. Throughout the next multi-decade energy transition, reliable baseload fuels will be required. This will support continued demand for coal, and in particular for the high CV coal that Whitehaven produces due to its higher energy content and lower emissions profile relative to other coal products.

Broker confident in Whitehaven share price

As my colleague James Mickleboro first pointed out, broker Morgans believes the high price of coal will generate “supercharged returns” for shareholders.

The broker has an additional rating on Whitehaven’s share price, with a target of $8.60. That suggests a possible increase of close to 10% in the next 12 months. He believes there is “great potential for longer dislocation in energy markets where security of supply commands a higher premium for longer.”

With Whitehaven turning a profit and returning to paying fully franked dividends, it could pay a gross dividend yield of 14.5% in FY23 and 11.5% in FY24, according to Morgans.

Based on earnings expectations, Morgans values ​​Whitehaven shares at 3x estimated FY23 earnings and 7x estimated FY24 earnings.

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