Summary. Yancoal’s core net profit in 1H19 grew ~4% YoY to A$345mn, which is in line with our expectation. The profit growth was mainly helped by lower finance expense. We believe debt repayment will continue to be the risk reduction driver for the Company. Yancoal has maintained its guidance on production volume and cash cost for the full year. We left our earnings forecast unchanged and our DCF-based TP is HK$24. The Stock is attractively trading at 5x 2019E P/E and 10% dividend yield.
- Key highlights on 1H19 results. Reported net profit came in at A$564mn, up 56% YoY, due to a one-off tax benefit of A$219mn as a result of the finalization of tax base on C&A acquisition. Excluding this tax benefit and other non-recurring items, the net profit grew ~4% YoY to A$345mn, representing 47% of our full year estimates. Ex-mine sales volume of coal grew 2% YoY to 16.5mn tonnes while ASP dropped 3% YoY (largely in line with market trend). Total revenue (including other income) remained stable YoY in 1H19. Unit cash operating cost (excluding government royalties) was A$62/t in 1H19, unchanged YoY. The profit growth came mainly from an 18% reduction of finance expense as Yancoal repaid US$500mn debts in 1H19. Yancoal generated strong operating cash flow of $783mn in 1H19, up 10% YoY. Net debt to equity ratio reduced from 53% in Dec 2018 to 48% in Jun 2019. Yancoal declared interim dividend of A$136.7mn, implying payout ratio of 24% (based on reported earnings) or 40% (based on core earnings).
- Full year guidance unchanged. Yancoal maintains its full year production target of 35mn tonnes and cash cost target (excluding government royalties) of A$62.5/t. Besides, Yancoal maintains its dividend payout target ratio of 50%. This implies 10% dividend yield based on our earnings estimate. Full year capex budget is unchanged at A$285mn.
- Key risks: (1) weakness in coal price; (2) disruption in coal delivery; (3) higher-than-expected production cost.
