New Hope Corporation Limited

ASX:NHC

New Hope Corporation Limited

ASX:NHC
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$3.99 (+2.8%)
Last close price
#47
Rank
12
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19
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Reports (5) My Report Forum Investors
Forum Topics NHC NHC Bull case/thesis

Pinned straw:
Rocket6
Added 2 months ago

Took a position in New Hope this week, with the share price under $4. @PhilO I agree with much of what you have said. This is a magnificent business -- perhaps a little boring/big for me as a typical small cap investor -- but history supports that boring businesses can be the best ones.

For transparency, my satellite portfolio is where I keep my smaller (market cap) positions. This doesn't fit the bill for that. I have been wanting to buy New Hope for well over a year now for my super portfolio (typically consists of my larger cap holdings like Codan, Jumbo, MinRes and the like). New Hope finds a home amongst those.

Thesis: relates to their growing output, lowering costs and top class management team.

The industry for obvious reasons is unpopular and outdated, and we shouldn't see any new investment into coal mines outside of the key few existing players. On that note, New Hope are one of a very small few coal players that are seeking to increase production. Coincidentally this probably means New Hope won't trade at a premium, but I expect them to spit out loads of cash over the next few years and continue to benefit from a lack of widespread investment in the sector and a slow-to-innovate federal government. I don't like the fact we are so reliant on coal as a country, but this doesn't change the fact that we are.

In FY25, New Hope's saleable output was 10.7m tonnes. Conservatively, this will increase a few million tonnes over the next few years. With rising production and operating leverage kicking in as they grow/expand, dividends are likely to be well supported. But that relates to the current market position where coal prices are in the toilet (having decreased) and most competitors are struggling to make a buck -- all while New Hope continue to print cash, with output growing and costs expected to continue to decrease. Consequently, with a net cash position of around 450m, risk is very low here, but there is plenty of blue sky opportunity ahead with any subsequent improvement of the cycle or supply issues. In the meantime, let's assume a 10% fully franked dividend yield (or similar) while I wait for said blue skies. Not bad, right?

Perhaps strategically, this is also a bit of a hedge in an increasingly expensive market. That said, I still expect this to deliver market-beating returns.

Valuation wise, a trailing PE of 8x seems reasonable to me. Without any major hiccups in terms of risks (mentioned below), my DCF returned a share price in excess of $7.00 using various scenarios. As above, i think New Hope is attractive at these levels.

Risks include infrastructure and weather related events, regulatory/environmental risk and commodity volatility.

Disc - held
PhilO
Added 2 months ago

Thanks for sharing the analysis @Rocket6. My simple back of the envelope simply concluded the current price didn’t make sense. Given its spewing out this level of cash at what seem like a low point in coal prices, and given locked in expansion, the upside potential is far from boring (as we witnessed a few years ago when coal prices surged to $400). The trickier decision I found was how much I should allocate to it. For me that’s really a question of downside risks, which you touched on. This seemed risky at first thought. But when I thought about the risks one by one, I concluded they were mostly low. I’m feeling the key risks relate to government regulation. It wasn’t that long ago a tax was slapped on coal mining out of nowhere when coal prices were super high. There is also global pressure to speed the transition off coal. Key to this though is much of new hope’s markets are in Asia which is far from being ready to turn off coal. If coal was turned off, most of the world’s population (India and China) would face immediate blackouts and other regions would see a 100% higher electricity prices. I’ve seen predictions it would take 20-30 years to properly phase out coal, with potential for 80% to be phased out by 2040. That impacts coal miners runway, however if that happened I imagine a lot of supply would come out with only the highest quality lowest cost producers remaining. Because of this I’d suggest holding the lowest cost, highest quality producer within close proximity of Asian markets is a low risk bet. Anyway I concluded the downside risk is limited. And my personal holding is large. Maybe larger than it should be! There is a low probability high impact risk that in the coming years the Australian government will just shut it down ahead of the phase out with Asia drawing on other supply.

What may be an elephant in the room for many is the ethical question. Which I thought about. However the other lens to see this through is that the world isn’t ready to turn off coal. Turning it off now would be catastrophic for most of the world’s population who would immediately black out. The unethical thing in my opinion would be to not provide it. Ethical concerns should be directed at demand not supply.

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Rocket6
Added 2 months ago

@PhilO agree across the board. Relating to renewable energy, talk is cheap. Speaking specifically about Australia, when the majority of the country's energy is sourced from coal and gas, it is inconceivable to even consider extreme cases like turning our back on coal. In 2000, black coal (not inc brown coal) accounted for just under 60% of Australia's electricity generation in Australia. This figure was around 35% in 2024. That is progress, but it supports that this process is a lengthy one.

I think the below articulates what we both seem to agree on:

baf3e41846f06431e9cced3f27cb8bf53dd91a.png

10
PhilO
Added 2 months ago

Nice chart @Rocket6, playing around with a few scenarios, the current price looks ok to me even with the most ambitious of coal phase out targets.

11
PhilO
Added 2 months ago

Been thinking about something. I wonder if part of why the market tends to undervalue companies with a clear or possible end date, like perhaps New Hope, is a behavioural bias that makes us over account for that eventual shutdown.

Hypothetically using an example where operations cease after 30 years, there’s an interesting thing that happens towards the end of that period when you model cashflow. If you assume earnings just grow with inflation, the impact on value of the 30 year wind down isn’t that dramatic. Most of the value still sits in the first couple of decades, and the difference between a 30 year horizon and a perpetual one might only be around 20%.

Yet markets often seem to price these businesses as if that long tail doesn’t really exist, maybe focusing too much on the perceived end, and not enough on the cash flow between now and then. Just a theory, but sometimes industries in terminal decline can make for great investments.

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