Description
Peabody: $45 Price Target
On April 3rd, Peabody Energy will emerge from chapter 11 bankruptcy. Peabody entered bankruptcy a little less than a year ago, and it set to emerge with net debt of $1.1bn, down from $7.6bn; and with 2017 and 2018 free cash flow generated from reasonable price decks, will be net cash by year end 2018.
Based upon a favorable asset mix of Aussie met and thermal, and U.S.-based thermal from the PRB and Illinois Basin, we believe BTU should trade at around $45 per share. This represents compelling upside to the high $20’s/share price implied by the bonds. The following comments and analysis justify that valuation.
Price Deck & Implied EBITDA: We are using the 2017 forward curve to price 2017 EBITDA in conjunction with management’s guidance on costs. For 2018, we are using an average price of $138 for met, $64 for Newcastle, and $12.75 for PRB. We arrive at 2017 EBITDA of $1.25bn, and 2018 at $1.11bn.
Cash Flow Per Share: BTU cash flow will approximate about $5/share each year at the outset using the price deck above. That is based on company guidance of capex and the interest rate on the bonds and bank debt of approximately 6%. Cash taxes will be low, we have them at 10% based on a blend of operating income and the company’s A$4bn NOL at the Australia entity.
Valuation: We are using the average of a range of multiples on EBITDA, FCF, and FCF/Equity Yield. The company guides to a fully diluted share count in their presentation (filed by 8-K on March 24, 2017) of 137mm shares. Based on the EBITDA and FCF outlined above, at 5.5x EBITDA, BTU should trade at $45/share, and 10% FCF yield. We consider this to be un-demanding based on the comps, the mix of contracted production, the balance sheet, and strength of management.Notably, BTU always traded at a premium to its public comps prior to the wave of bankruptcies.
Uses of Free Cash Flow: The term loan requires a sweep of cash flow. We view this as a conservative approach to conservative leverage, and driving organic equity growth. A majority of the term loan will be retired within 12 months, and the company will be net cash with $800mm of cash on the balance sheet by 3Q2018. Dividends and share repurchases should begin in 2018 as net leverage is zero.
Other Areas of Discussion:
1. Cyclone Debbie: A CAT 4 cyclone just hit Queensland, the area where over 70% of seaborne met coal travels from source to China. This supply disruption has the potential to drive spot to greater than $200/tonne, and 2Q benchmark settlement talks have now been postponed as miners await the damage assessment. YanCoal called force majeure along with a number of ports, terminals and other producers. BTU stock could be emerging from bankruptcy at the perfect moment.
2. Consolidation: It’s been discussed that BTU could merge with ARCH. Their largest PRB mines are Black Thunder and North Antelope, about 14 miles apart on google maps. Their headquarters are both in St Louis about 11 miles apart. We believe there are upwards of $150mm of annual cost to be taken out in a merger scenario, or about $1bn of NPV of synergies to be shared amongst the parties. We believe this administration would be amenable to approving the deal.
Exhibit 1: Financials
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Shareholder rotation from creditors to dedicated equity investors
- Widespread initiation on the new entity