They say never buy a resource stock for yield however yesterday we did, adding a 3% position in NHC to the Income Portfolio. Coal & Coal stocks have surprised many on the upside, including MM, and while we positioned early for the theme in our Growth Portfolio, we got off the train too early. However, NHC is now a compelling income opportunity, albeit with a higher level of risk hence the small weighting. The price of Thermal Coal which is used in electricity generation ran to a high of $US465/t in September, only to correct ~35% on softer Chinese demand and a warmer-than-expected start to the Northern Hemisphere Winter. Coal stocks corrected sharply as a result and presented us with an attractive risk/reward entry opportunity.
We think the weakness in the Coal price will be short-lived given the demand versus supply outlook and recovery back to near all-time highs for NHC is a strong possibility. Even at current coal prices, NHC trades on a 20% free-cash-flow yield – in other words, this is the amount of free cash being generated as a percentage of its market capitalisation, while on broker forecasts, that jumps to ~50%. With a consensus yield above 8% fully franked, we think NHC makes a good, albeit higher risk addition, to the MM Income Portfolio.
NB: Free cash flow yield describes how much free cash flow is available in relation to a company’s market capitalisation—that is, relative to the company’s stock market value. Free cash flow yield is mainly used to calculate how much cash is paid out to shareholders through dividends.
MM is bullish & long NHC in the Income Portfolio
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