What's new
■ Production upsurge
■ Significant debt reduction
■ Improved pricing
After several years of less than ideal newsflow from coal miner, UK Coal, the group released a trading update this month which should provide a degree of reassurance for shareholders. Indeed, first-half coal production grew 70 per cent to 4.1m tonnes and the group has been better able to exploit the rise in wholesale coal prices as the number of its lower-margin legacy contracts fell during the period. That helped contribute to a 20 per cent rise in the realised price per gigajoule to £2.36.
What's more, as part of the group's strategic recovery plan, new chairman Jonson Cox and his team have been devising the most effective means of exploiting the company's extensive property assets in order to pay down debt. Last month, for instance, the group realised another £12.6m through the sale of 1,760 acres of prime agricultural land to the Church Commissioners, which helped to bring down net debt by 14 per cent since the year-end to £207m. At this time last year, UK Coal's property portfolio was valued at £384m, although the current fragility of the UK commercial property market means that management is likely to take a measured approach to any future property disposals.
Numis Securities says…
Buy. UK Coal’s first-half update shows good production. The strategic recovery plan continues and we believe this is essential to the ongoing health of the business. As the group crystallises value from its land holdings and de-risks the coal operations, the company has the potential to unlock significant value from the asset base. In our view UK Coal remains an interesting recovery play and, if the strategic recovery plan is successful, the shares could have material upside. Although we have left full-year estimates unchanged - expect a £1m pre-tax loss for 2011, giving a loss per share of 0.33p.
Evolution Securities says…
Buy. UK Coal has delivered solid first-half coal production and the company currently looks to be ahead of our full-year estimate of 7.2m tonnes. However, we leave our production assumptions unchanged for now given that the previously flagged risk of a face gap at the Daw Mill site still remains after operational issues of last year. Nevertheless, the company has followed a clear strategy to reduce this risk by reconfiguring, and thereby extending, the current panel (or coal seam section), albeit at reduced rates, while installing equipment for the new panel ahead of time. And, with a 59p price target, we reiterate our buy recommendation - expect adjusted full-year EPS of 5.5p.
