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Exxaro 1H21 results buoyed by iron ore

Exxaro reported results for the six months ended 30 June 2021 on 12 August 2021. The diversified coal, energy, and ferrous resources firm announced a significantly higher interim dividend, as iron ore prices buoyed its 1H21 income inflows. Exxaro’s dividend policy is to pass through100% of the dividend it receives from its c. 21% stake in the Sishen Iron Ore Company (SIOC) and to pay 28% to 40% of adjusted group earnings. The 1H21 dividend was also boosted by proceeds from the sale of Exxaro’s Tronox stake, which was used to fund an R7.79/share special dividend and an R1.5bn (R6.00/share) buyback. Since 2017, Exxaro has consistently returned a high proportion (generally > 75%) of earnings generated to shareholders.

The total Group revenue rose by 8% YoY to R51.1bn on the back of higher coal revenue and the inclusion of renewable energy revenue from Cennergi (the company’s diversified independent power producer [IPP]). Earnings doubled YoY, driven by iron ore, while net operating profit rose 29% YoY to R5.2bn.

Earnings from Exxaro’s stake in the SIOC nearly tripled over the period under review and now represent c. two-thirds of pre-tax income for Exxaro. The remainder is largely coal and here net operating profit was flat YoY. While coal production and sales were 12% and 10% lower YoY, respectively, a c. 47% jump in the average benchmark export price of coal, positively offset the impact of the COVID-19 pandemic and the Transnet Freight Rail challenges which the company experienced.

Figure 1: Exxaro 1H21 results overview, in Rbn except per share

Source: Anchor, Bloomberg

Exxaro is paying 29%-40%* of Group adjusted earnings.

Export thermal coal prices have been incredibly strong recently and in Figure 2 we highlight prices since 2010.

Figure 2: Export thermal coal prices, US$/tonne

Source: Anchor, Bloomberg

Exxaro had a few interesting comments on the coal market, which we highlight below:

  • The company said that the Atlantic Basin supply was very tight at the moment – this is the first time in a long time that Exxaro has made this comment since the Atlantic Basin has generally historically been oversupplied.
  • A hot summer in Europe is helping demand.
  • There has been low output from renewables and gas prices are rising from last year and 2019’s lows and are now at quite expensive levels.
  • There has also been quite a bit of switching back from gas to coal.
  • Historically, there have been record stock levels in Europe (in cities such as Amsterdam, Rotterdam, and Antwerp), but these inventory levels are currently at very low levels (c. 4mt).
  • China’s ban on Australian coal has resulted in China being very short on coal and Chinese domestic supply was also reduced by China due to safety concerns.
  • There are other regional supply issues (in Russia, Indonesia etc.) and, as a result, China has been a very strong buyer of South African (SA) coal.
  • YTD, however, China’s coal imports are down 21% YoY.
  • Exxaro’s medium-term view on coal remains that demand in Europe will continue to decline by c. 3% p.a., but the company said that this does not change its long-term view on coal at all.
  • The fact that there are so many variables, makes it difficult to forecast but Exxaro sees a case for strong pricing for the remainder of the year.

Exxaro is not hugely exposed to export thermal coal prices (iron ore and long-term coal contracts are the majority of its business).

Figure 3: Exxaro coal net operating profit (Rbn)

Source: Anchor, company reports

Figure 4: Exxaro dividend payout ratio

Source: Anchor, company reports

Figure 5: Exxaro consensus 12-month forward P/E history (now 3.8x)

Source: Anchor, Bloomberg

Figure 6: Exxaro 1H21 SoTP valuation

Source: Anchor, Bloomberg

Exxaro is currently trading at a 3.8x forward P/E multiple. The multiple has consistently contracted for some time as earnings growth has been strong since 2017. We value Exxaro on a sum-of-the-parts (SoTP) basis at R202/share, with about 75% of that value coming from iron ore and the remainder coming from coal (see Figure 6). That suggests an 11% upside to current share price levels. Therefore we believe that Exxaro is quite fairly priced at present.




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