‘Significantly undervalued’: coal play Universal Coal reckons it’s a cheap buy
If thriving coal miner Universal Coal had operations in Australia it would be valued a lot higher says boss Tony Weber.
But the company’s (ASX:UNV) thermal coal operations are in South Africa – a country associated with political risk.
And its low valuation and strong growth potential are likely reasons it’s again being courted by a potential suitor.
Although only an indicative bid at this stage, it is the third approach Universal Coal has received.
“We are significantly undervalued relative to our Australian peers, and obviously with the South African business landscape having changed and people willing to put money back into the country, from that perspective I think we are one of those low hanging fruit,” Mr Weber told Stockhead.
Prior to announcing the indicative offer of 35c cash per share, Universal was trading at about 27c, giving it a market cap of over $141 million.
Shares started to go for a run a few days before the news was announced and they reached a high of 32.5c – a gain of over 20 per cent.
Universal is currently trading at around 30.5c – giving it a market cap of just below $160 million.
“[The offer] is a premium to the share price, but you look at the cash we’ve been generating relative to other Australian companies – you see it is a significant discount to what an entity generating this kind of cash would be achieving if it was operating in Australia,” Mr Weber said.
The company reported a record 800 per cent profit increase to $35.9 million for FY18 and it is still expanding.
Universal announced earlier this year it was picking up a third producing coal mine in South Africa and expects that to boost its production from January next year once the deal is finalised.
The company sold 4.7 million tonnes of coal in FY18 — a 57 per cent improvement over the prior year — and it forecasts it will produce 6 million tonnes this financial year.
Earnings before interest, taxes, depreciation and amortisation for FY19 is predicted to climb 29 per cent to $93 million.
Mr Weber said that will grow further with the company’s goal to get to over 8 million tonnes next year and over 10 million tonnes the year after.
“There’s a significant growth profile coming through within just our company, which tells you something about the prospects within the country and the coal sector at the present moment,” he said.
Universal has contracts in place to sell its lower quality thermal coal to South African power provider Eskom and it exports its higher quality coal.
A global crackdown on emissions means there is now higher demand for better quality coal.
Higher quality coal means power stations can burn less to produce the same amount of energy.
Universal already pays dividends and is planning to increase its shareholder returns as it ramps up its cash flow.
“Every year has been growth in this company and we haven’t raised money from the shareholders for the last I don’t know how many years,” Mr Weber said.
“We’ve been paying dividends for the past two years. It’s a progressive dividend and we intend to increase that going forward.”