Stanmore Coal is ‘grossly undervalued’ and that’s why the takeover failed
Sydney-based hedge fund Regal says junior producer Stanmore Coal is “grossly undervalued”.
Regal last week sunk another $2.5m into Stanmore Coal (ASX:SMR) and has been building its stake in the company since August last year.
“Stanmore is grossly undervalued at 95c,” Regal’s Tim Elliott told Stockhead.
“The company is generating very strong cashflow, with substantial near- and medium-term development options and an extensive pipeline of earlier stage projects, a couple of which have material value.”
Stanmore was the target of a failed takeover bid by Golden Investments, which tabled a 95c cash per share offer last year.
But the independent expert’s report by BDO Corporate valued Stanmore at $1.48 to $1.90 per share.
Mr Elliott said this was despite assuming coking coal prices fall more than 25 per cent.
At 95c the ratio of Stanmore’s enterprise value to its earnings was about 1.5x, Mr Elliott said.
Enterprise value is a measure of a company’s total value. It is calculated by adding market capitalisation and outstanding debt together, then subtracting the cash and cash equivalents.
“Applying the about-4.5x multiples of comparable listed coal producers would value Stanmore close to $3,” Mr Elliott said.
Following news of the takeover bid, Stanmore’s share price hit a 52-week high of $1.08 and continued to trade around the 95c level before slipping back to 92.5c by Friday close.
Golden Investments’ hostile takeover bid came to an end last Wednesday, with the suitor only attaining 25.47 per cent of the company.
Mr Elliott said the offer grossly undervalued Stanmore and was rejected by the substantial majority of shareholders.
“After the 95c takeover bid was announced the company upgraded FY19 earnings and production guidance and also announced a dividend and buyback to return cash to shareholders,” he said.
Stanmore only started paying dividends at the end of the 2018 financial year.
This latest return is already a 50 per cent hike on the full-year dividend it paid in November last year and this is just an interim dividend.
Managing director Dan Clifford told Stockhead last week that his only motivation for giving back more cash to shareholders is to show the company does what it says it’s going to do.
“Our mantra in the business is if you’re going to do something, do it early and we were always going to do a dividend, so we did it early,” he said.
“It just happened within a takeover period.
“There will always be timing issues but there is nothing better when talking to your shareholders to match your rhetoric with action and that’s our motivation.”
Stanmore appears to be doing well, having “materially” upgraded its FY19 targets to 2.15 million tonnes per annum of coal production and earnings to between $140m and $155m.
Mr Elliott would not comment on whether Regal would continue to up its stake in Stanmore.
So who else does Regal like?
Regal is also keeping a close eye on manganese producer Jupiter Mines (ASX:JMS), which has fallen hard from a peak of 43c just after listing in April last year to 23.5c.
Floated at 40c a share, Jupiter was the biggest initial public offering by a mining company on the ASX in eight years.
“Jupiter Mines has a large-scale long-life manganese mine generating very strong cashflow to support a current dividend yield of approximately 30 per cent,” Mr Elliott said.
“Chinese demand for manganese is growing quickly partly due to new rebar standards that require a greater proportion of manganese, and the closure of low-grade manganese mines in China due to depletion and more stringent environmental controls.”
Manganese is the fourth-most-traded metal in the world. Only aluminium, iron ore and copper are more widely used.
About 90 per cent of manganese goes into steel-making, but it’s increasingly used in next-generation battery and power storage applications.