Yancoal Australia (3668 HK) Company Update Summary
Core Content
Yancoal Australia (YAL) has taken a significant step by prepaying US$1bn (~A$1.56bn) of debt, which is expected to reduce finance costs and enhance its financial stability. This action is seen as a positive development, contributing to a further reduction in overall debt and improving the company's net cash position. The debt repayment is estimated to save US$207mn (~A$323mn) in interest costs over the loan periods, and is expected to increase net profit by 0.3% in 2022E, 1% in 2023E, and 1% in 2024E. Yancoal's strong free cash flow (~A$4bn) is expected to support a 50% dividend payout ratio for the year.
Key Points
- Debt Prepayment: Yancoal plans to repay US$1bn of debts on 4 October, including syndicated loans and unsecured related-partly loans. This will save ~A$323mn in interest costs.
- Debt Reduction: Over the past 12 months, Yancoal has paid down a total of US$2.3bn in debt, reducing its gross debt to US$792mn (~A$1.23bn).
- Net Cash Position: Yancoal has maintained a net cash position since July, and is projected to have net cash of A$3bn by end-2023E, equivalent to 40% of its current market cap.
- Dividend and Valuation: The company is expected to maintain a 50% dividend payout ratio. The stock is valued at a P/E of 1.7x for 2022E and offers a 21% yield. The target price is HK$53, with a +82% upside from the current price of HK$29.05.
- Investor Confidence: The company is considered a safe haven for hedging against FX and geopolitical risks due to its exposure to USD-denominated coal prices and A$-denominated costs. The ongoing geopolitical tensions and energy crisis in Europe are expected to support global coal prices.
Financial Highlights
| Financial Metric |
FY20A |
FY21A |
FY22E |
FY23E |
FY24E |
| Turnover (A$ mn) |
3,473 |
5,403 |
11,293 |
10,311 |
9,501 |
| Core Net Profit (A$ mn) |
-1,040 |
791 |
4,538 |
3,800 |
3,245 |
| Core EPS (A$) |
-0.79 |
0.60 |
3.44 |
2.88 |
2.46 |
| EV/EBITDA (x) |
-80.3 |
3.4 |
1.0 |
1.1 |
1.3 |
| P/E (x) |
n/a |
8.3 |
1.7 |
2.0 |
2.4 |
| PB (x) |
1.4 |
1.1 |
0.8 |
0.7 |
0.6 |
| Yield (%) |
0.0 |
9.9 |
20.8 |
17.4 |
14.9 |
| ROE (%) |
-18.3 |
13.9 |
59.7 |
39.0 |
29.1 |
| Net Gearing (%) |
68.7 |
31.6 |
Net Cash |
Net Cash |
Net Cash |
Key Risks
- Decline in Coal Price: A decrease in coal prices could impact profitability.
- Easing Geopolitical Tension: If geopolitical tensions ease, it may reduce the support for global coal prices.
- Higher Production Costs: Unexpected increases in production costs could affect margins.
Operating and Production Assumptions
| Metric |
2017 |
2018 |
2019 |
2020 |
2021 |
2022E |
2023E |
2024E |
| Marketable Coal Production (mn tonnes) |
43.8 |
46.1 |
49.4 |
48.9 |
44.8 |
39.8 |
41.6 |
43.5 |
| Attributable Sales Volume (mn tonnes) |
19.3 |
33.5 |
35.6 |
37.4 |
37.5 |
32.0 |
33.5 |
34.7 |
Coal Price and Cost Assumptions
| Type |
2022E |
2023E |
2024E |
| Thermal Coal ASP (A$/tonne) |
350 |
300 |
260 |
| Metallurgical Coal ASP (A$/tonne) |
320 |
300 |
290 |
| Blended ASP (A$/tonne) |
346 |
300 |
265 |
| Unit Cash Operating Cost (A$/tonne) |
-112 |
-110 |
-107 |
| Unit Cash Operating Cost (excluding government royalties) |
-85 |
-86 |
-86 |
Valuation Methodology
- Valuation Approach: Net Present Value (NPV) is used to value YAL, which is common for mining companies.
- Key Assumptions:
- Long-term thermal coal price: A$120/t (starting 2025E)
- Long-term metallurgical coal price: A$160/t
- Unit cash cost inflation: 2% p.a.
- WACC: 5.9% (based on a 3.7% risk-free rate, 7% risk premium, 0.3x beta, and 10% debt/capital ratio)
- AUD/HKD rate: HK$5.3
Target Price Sensitivity
| WACC |
Thermal Coal Price (A$/t) |
Metallurgical Coal Price (A$/t) |
| 3.9% |
22.9 |
47.6 |
| 4.9% |
26.6 |
48.5 |
| 5.9% |
29.3 |
48.9 |
| 6.9% |
31.4 |
48.9 |
| 7.9% |
32.9 |
48.7 |
Analyst Recommendations
- Ratings: BUY
- Target Price: HK$53.0
- Analyst: Wayne Fung, CFA
- Contact: (852) 3900 0826, waynefung@cmbi.com.hk
Shareholding and Performance
| Shareholder |
Percentage |
| Yankuang Energy |
62.26% |
| China Cinda AM |
13.74% |
| Others |
23.99% |
| Share Performance |
Absolute |
Relative |
| 1-month |
-11.7% |
2.3% |
| 3-months |
3.8% |
31.7% |
| 6-months |
16.2% |
50.0% |
Market Position
- Australia's Largest Coal Exporter: Australia is the largest exporter of coal, as per Figure 1.
- Market Share: YAL holds a significant market share in Australia, as shown in Figure 4.
- Mine Locations: Figure 5 highlights the locations of YAL's coal mines.
- Production Trends: Figure 6 provides sales volume projections, and Figure 7 outlines production trends.
- Price Trends: Figures 8, 11, 12, 13, and 14 provide insights into coal price trends and regional revenue breakdowns.
Conclusion
Yancoal Australia's debt prepayment is a strategic move that reduces financial risk and improves net profit margins. The company's strong free cash flow and net cash position support its ability to maintain a high dividend payout ratio. With a target price of HK$53, the stock is considered undervalued, offering a 21% yield and a P/E of 1.7x for 2022E. The company's exposure to USD-denominated coal prices and A$-denominated costs positions it as a safe haven in times of FX and geopolitical uncertainty. However, the company faces key risks including potential coal price declines, easing geopolitical tensions, and rising production costs.
