Despite suspending their particular dividends, the steel-focused coal firm, Warrior Met Coal (NYSE:HCC) nonetheless noticed prospects for his or her large particular dividends to come back again sooner or later, as my earlier article mentioned. Since greater than half a yr has subsequently elapsed, this text supplies a refreshed evaluation that critiques their up to date outlook, which sees traders successfully capable of purchase now and obtain a ten% to twenty%+ refund inside the subsequent 13 months regardless of their very low dividend yield of solely 0.63% months, as their particular dividends lastly return as soon as once more.
Executive Summary & Ratings
Since many readers are possible brief on time, the desk under supplies a really temporary govt abstract and scores for the first standards that had been assessed. This Google Document supplies an inventory of all my equal scores in addition to extra info relating to my ranking system. The following part supplies an in depth evaluation for these readers who’re wishing to dig deeper into their scenario.
*Instead of merely assessing dividend protection by means of earnings per share money circulation, I choose to make the most of free money circulation because it supplies the hardest standards and likewise finest captures the true affect upon their monetary place.
After seeing their money circulation efficiency demolished throughout 2020 by the now notorious Covid-19 pandemic and its ensuing extreme downturn, fortunately, their working money circulation began recovering throughout 2021. This noticed the yr end with a results of $351.5m, which was greater than thrice their earlier results of $112.6m throughout 2020 and starting to push again in direction of their pre-Covid-19 outcomes of circa $550m throughout 2018-2019. It additionally marks an enchancment versus their earlier results of $45.2m seen through the first quarter of 2021 when conducting the earlier evaluation, as their full-year outcomes equate to a circa $90m per quarter run fee and thus primarily twice the speed as the place it began the yr. Their enhancements throughout 2021 had been pushed by increased metallurgical coal costs greater than offsetting their 15% year-on-year gross sales quantity lower versus 2020 that resulted as a consequence of strikes, as per slide 4 of their fourth quarter of 2021 outcomes presentation and the graph included under.
It will be seen that their promoting value throughout 2021 was $180 per ton, thereby broadly equally their outcomes throughout 2018-2019 and thus serving to offset their decrease gross sales volumes. Since their manufacturing decreased virtually twice as a lot throughout 2021 at 29%, it signifies that their future gross sales volumes might undergo extra significantly throughout 2022 if this strike stays unresolved, as they boosted their gross sales volumes throughout 2021 by working down their stock. Unfortunately, there seems to be little information of this strike ending with the one-year anniversary passing lately, which additional compounds the traditional uncertainties inherent with notoriously unstable commodity costs and contributes considerably to their particular dividends remaining postponed regardless of in any other case rising their fastened dividends by 20%, as per the commentary from administration included under.
“It’s a possibility, we named a few factors that we want to get a little more clarity on, such as what we think the market will look like for the rest of the year. As we said, look, with the Chinese coming back after the new year in Olympics, want to see exactly what kind of policies and impact on the markets they may have. The strike as well and taking an over look at developing Blue Creek, that data is about two years old on Blue Creek and we want to pull together a refresh on the total cost of that project and the metrics and everything and see if that still makes sense. And so once we get a little clarity on those things, I think we will — we may have a change or an update on our capital allocation policy. We did up — or increase the quarterly dividend 20%, which was a small change, but still very good for us.”
-Warrior Met Coal This fall 2021 Conference Call.
They historically declare their particular dividends over the past week of April, which is merely weeks away as of the time of writing, and given the latest language from administration, it appears unlikely that 2022 will see any particular dividends. Whilst I nor anybody can precisely predict when this strike can be resolved, fortunately, it stays potential to estimate their capability to fund particular dividends as soon as they resume, which seem alike to a coiled spring after years suspended.
Due to the very robust working situations inside commodity markets, particularly metal the place their metallurgical coal is utilized, it appears secure to imagine that their working money circulation for 2022 roughly matches their outcomes from 2021, thereby offering a conservative outlook with a margin of security given their ongoing strike. Since their working money circulation was $351.5m throughout 2021, it will go away circa $250m after funding their capital expenditure steering for 2022 of $100m on the midpoint, as per their fourth quarter of 2021 outcomes announcement. This would go away their estimated free money circulation at circa $210m as soon as subtracting their miscellaneous money bills, which had been $40.4m throughout 2021 and largely relate to their finance lease obligations, as listed beneath the primary graph included above. Despite boosting their fastened dividends by 20%, these stay comparatively immaterial at solely circa $12m every year, thereby leaving at the least circa $200m of extra free money circulation after dividend funds for 2022, which might simply develop increased if their strike is resolved and manufacturing will increase.
Following their lack of particular dividends since conducting the earlier evaluation, their web debt has now been fully eradicated with 2021 ending with a web money place of $40.9m as their money stability swells to $404.3m and thus primarily double their normal circa $200m stability throughout 2018-2020. This implies that assessing their leverage intimately could be pointless, and when trying forward, they haven’t any handbrakes positioned upon their skill to return money to their shareholders when administration feels extra assured.
Whilst it stays to be seen precisely how a lot capital administration directs in direction of their particular dividends as soon as they lastly resume sooner or later, in my opinion, it appears affordable to count on their money stability can be returned to its historic common of circa $200m that administration historically held throughout the years. If resumed on the finish of this month, this might see circa $200m returned, which on their present market capitalization of roughly $1.96b would see a really excessive dividend yield barely above 10%. On the opposite hand, in the event that they wait one other yr till April 2023, their money stability ought to improve at the least one other $200m, if not much more, given their beforehand mentioned money circulation outlook, thereby seeing their capability for particular dividends swelling to $400m and thus offering a large 20%+ yield on present price inside as little as 13 months from now.
Quite unsurprisingly, their money construct sees their liquidity additional enhance with their present and money ratios now sitting at 5.14 and three.31 respectively, thereby simply warranting a powerful ranking. Until such time as they return their latent extra money by way of particular dividends, their ensuing web money place implies that there are zero considerations over their future debt maturities or skill to entry capital from credit score services.
Whilst not ideally suited for shareholders to be left with out particular dividends for the previous two years, fortunately, they’ve constructed up the capability to fund large funds with their money stability doubling from its normal stage. Regardless of whether or not this comes by means of one cost quickly throughout 2022 and one other throughout 2023 or one large cost throughout 2023, traders can successfully purchase now and count on to obtain a ten% to twenty% refund inside the subsequent 13 months. Since this sees their shareholder returns alike to a coiled spring, I consider that upgrading to a purchase ranking is now acceptable.
Notes: Unless specified in any other case, all figures on this article had been taken from Warrior Met Coal’s SEC filings, all calculated figures had been carried out by the writer.