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The industry for obvious reasons is unpopular and outdated, and we shouldn't see any new investment into coal mines outside of the key few existing players.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
