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Summary New Hope is one of Australia’s companies focused on coal. It says it wants to acquire new projects with its A$1B working capital position, but it’s spending cash like there’s no tomorrow. The dividend is 7 times higher than the free cash flow is. If New Hope is serious about its expansion plans, it should reduce its dividend payments right now. Introduction After identifying Whitehaven Coal ( OTCPK:WHITF ) as a great coal company, I continued to look for other companies and was waiting for New Hope’s ( OTCPK:NHPEF ) financial results to see whether or not this is another coal company I should add to my list. Source: company presentation New Hope has a more liquid listing at the Australian Stock Exchange where it’s listed with NHC as its ticker symbol. The current market capitalization is approximately US$1.05B, so this isn’t your average micro-cap company. The company is still flowing cash Everybody knows the entire coal sector is suffering due to low prices, but fortunately the Australian producers have one advantage; the extremely weak Australian Dollar. As the Australian currency has lost in excess of 30% of its value in just one year time, the Australian companies are doing much better than their competition as even though they are still selling the coal in USD, the local expenses are a few dozen percents cheaper than one year ago, protecting the margins. (click to enlarge) Source: financial statements And yes, this seems to be proven in the company’s financial statements as even though the revenue decreased by 11%, the cost of sales fell by 17% and this would have resulted in a pre-tax profit of A$73M ($52M), if New Hope would have been able to avoid an A$97M impairment charge. This pushed the pre-tax profit in the red and even after a small tax benefit the bottom line was still showing a net loss of almost A$22M ($16M). Fortunately an impairment charge never has any influence on a company’s ability to generate cash flows, so I would think the cash flows of New Hope would remain pretty decent but the only way to find out is by checking the cash flow statements. That’s why I waited for New Hope to publish its annual report, as (unlike the quarterly reports), the company has to provide a cash flow overview as well. (click to enlarge) Source: financial statements The operating cash flow was A$88.5M ($63M) (after taxes), and whilst that’s still pretty good, considering the worsening circumstances on the coal market, you shouldn’t forget the total capital expenditures were A$115M ($82M), so New Hope was free cash flow negative. Again, that’s nothing to worry about because a) the negative cash flow is still limited and b) New Hope has a substantial amount of cash on its balance sheet. The negative free cash flow was A$26.5M ($18M), but in the next part of this article I’ll explain why I’m not really worried about this cash shortfall. But is spending more than it receives, and I don’t like that Indeed, that’s New Hope’s strength. It has a working capital position of in excess of A$1B ($700M) and a current ratio of in excess of 11 and that’s extremely high. This strong working capital position will also allow New Hope to indeed pursue the acquisitions it has been eying as this must be the only coal company in the world with such a financial flexibility. (click to enlarge) Source: financial statements The majority of its cash is being held in term deposits, and this resulted in a total interest income of A$38M in FY 2015. This was sufficient to cover the shortfall of the operating cash flow to fund the capital expenditures, but despite the free cash flow increasing to A$11.5M, it’s quite annoying to see the company has spent A$79M on paying dividends. And it won’t stop there. Together with the presentation with the company has announced a final dividend of A$0.025 and a special dividend of A$0.035 to bring the total dividend for the financial year at A$0.10 ($0.07). Using the current amount of 831M outstanding shares, this means New Hope will be paying A$83M in dividends based on its FY 2015 results. And that’s a pity. The adjusted free cash flow was a positive A$11.5M, but paying A$83M in dividends is definitely weakening the company’s financial situation. Of course, it still has in excess of one billion of Australian Dollars in working capital, but I have a firm opinion the company should NOT pay out more cash than it’s taking in from its operations. Investment thesis The shareholders will be happy with a 6% dividend yield, but I believe not a single company should pay out more cash than it’s generating. New Hope has publicly declared it wants to acquire more projects, to paying out almost A$100M ($71M) in dividends probably is one of the most stupid things the company could do. I like coal, and I like New Hope’s strong and solid financial status, but it’s not helping the company at all to spend cash on dividends instead of keeping the cash in its treasury. The working capital decreased from almost A$1.2B to A$1.1B in the past year, and that seems to be a bit contradictory to the company’s public claims it’s looking for acquisition targets. If New Hope is really serious about becoming a major player in the coal space, it should cut the dividend and cash up. Now. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Scalper1 News
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