Despite a muted outlook for the coal sector, Johannesburg Stock Exchange-listed mining group Wescoal is attracting some attention from analysts.
Trading on a price to earnings multiple of 11.6 times earnings after a sharp rise in the second half of 2015, the company still appears to be attractively positioned should the sector turnaround and demand for coal rises.
In November 2014, Moneyweb research partners Intellidex rated the stock a “buy” noting: “Wescoal is in a growth phase and has expanded so far without much sacrifice in profitability. With its acquisitions, mining production volumes are set to double within the next 12 months.”
At the end of 2014, stock brokerage Imara SP Reid recommended the share as a “speculative buy” with the share trading at R1.90.
The brokerage told clients: “Wescoal’s growth potential depends on how fast and profitably it can ramp up production to meet Eskom’s demand because it sells most of its product to Eskom on long-term, fixed-margin and inflation-linked supply contracts, so it is not as exposed to coal export prices as the larger players. Though it pays less, the costs of supplying Eskom are lower and it’s a substantial and reliable market.“
In December 2014, Wescoal informed the market that it had received a letter of intent from a potential suitor to buy out the entire issued share capital of the business. The question that investors will be asking is whether or not there is further upside to a share which has rebounded strongly.
Keith McLachlan from AlphaWealth believes that the share continues to offer upside. When asked how investors should value the business, McLachlan pointed out that his current fair value for the share is around R2.40 per share. He felt that should the company be taken out by a bigger competitor, the acquirer could be expected to pay a 20-30% premium. He has a 12 month price target of R2.94 per share.