Investment Matters

Company Profit Reporting season

Reporting season kicked off for your portfolio this week, with Coronado the first result for your Equity portfolio.  The next two weeks will be busy …

But first a brief preview: 

As a general comment - the upcoming company profit reporting season comes with an interesting backdrop – earnings outlooks (ex Resources) are muted to say the least.  Yet the valuations of many companies, and of the market (All Ordinaries), are near record highs.  This implies that the reality of the earnings outlook has not been factored into the share prices of many companies.  Reporting season will provide a focus for investors on these matters.  All that said, dislocations in share prices often persist for longer than expected.

In regard to your Australian Shares (equity) portfolio – we are looking forward to the results being released.  Coronado was a positive result, as summarised below.  Negative expectations are built into the share prices of a number of companies in your Equity portfolio, as evidenced by their valuations vs share price, as well as P/E.  Reporting season will provide an opportunity for the earnings and outlooks for companies in your Equity portfolio to be in focus.

Coronado Global Resources

Coronado’s revenue grew 10.6%, supported by higher production at the Curragh mine and a 2.8% increase in the realised metallurgical coal price (met coal) (as compared to the pcp).  Combined with strong cost control (11% lower than the pcp), net profit meaningfully increased from US$111.2m for H1FY-18 to US$214.3m for H1FY-19 (ending 30-Jun-19).

It was also a positive result in regard to the dividend.  The company paid a fully franked dividend plus a capital return, totalling US$0.41 per share.  Over the last year, the company has paid a total of A$90.88 cents per share in dividends (@ AUD/USD 0.68 for the H2FY-19 dividend).  This compares to a current share price of $3.30, i.e. a historic yield of 27.5%.

Operationally Coronado is performing well.  It achieved increased production - even with some operational challenges.  It has a robust balance sheet (a net cash position as at 30-Jun-19), and it is implementing a mine expansion plan at the key Curragh mine.  Met coal now comprises 79.5% of production (77.4% pcp).

Note: Curragh was acquired from Wesfarmers in Mar-18 (not that long ago) for A$700m.  For H1FY-19 it generated EBITDA of US$271.7m (AU$399.6m @ AUD/USD 0.68).  Coronado has increased operating productivity (e.g. dragline efficiency and strip ratio), and it has both the opportunity to increase production further and a long remaining mine life (>20 years).  So - it has been a good outcome for Coronado shareholders (perhaps not so much for Wesfarmers’!).

Looking to future earnings, we are aware of met coal price pressures becoming evident, as also noted by Coronado.  They actively manage for this, as well as undertaking measures such as long term contracting.  Additionally, Coronado’s exposure to China is approximately 10% of its total sales.  That said, we factor a more moderate price environment into our future projections.   And finally, it should be noted that the declining AUD acts as a partial offset.  At the current low share price, we assess any risk to the met coal price is factored in.

 -          Fleur Graves