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Morningstar Recommendation....$5.50 fair value estimate

Adjusted net profit after tax increased 16% from AUD 147 million in fiscal 2011 to AUD 171 million in fiscal 2012. The result was driven by an 11% rise in coal sales volumes to 6.3 million tonnes and a 9% higher average thermal coal price of AUD 104 per tonne. New Hope also benefited from an increased proportion of higher priced export coal. Cost control was creditable with unit costs rising 4.4% to AUD 72 per tonne despite 8% inflation in diesel, 7% higher royalties and ongoing general mining industry cost inflation above the level of the broader economy.

Business Impact: New Hope’s fiscal 2012 result was broadly in line with expectations. Earnings per share of AUD 0.21 was slightly below our AUD 0.22 forecast but a AUD 0.31 fully franked full year dividend was much higher than expected, boosted by a AUD 0.20 special dividend. The special dividend was a surprise and reflects prudent capital expenditure deferral. We lower our fiscal 2013 earnings forecast marginally to AUD 0.20 per share assuming an average thermal coal export price of AUD 114 per tonne. Modest earnings growth to AUD 0.22 per share in fiscal 2014 assumes incremental volume gains and a slightly higher thermal coal price of AUD 121 per tonne. No change to our AUD 5.50 per share fair value estimate. Long term assumptions remain a contract thermal coal price of AUD 87.50 per tonne and a 10% weighted average cost of capital. The fair value estimate includes 60 cents per share for coal to liquids projects though these are early stage and speculative.

Forecast Impact: --

Recommendation Impact: New Hope remains modestly undervalued. We are pleased with management rhetoric regarding refocusing on unit costs rather than volume growth given the weak coal market. The balance sheet remains pristine and New Hope is well placed for opportunistic acquisitions should asset prices become more favourable.