Jan 14, 2024

Sentiment: Bearish

Type of Trade: Dividend | Defensive

Industry: COAL

Sector: Energy

TerraCom Limited (ASX: TER) is an Australian mining resources company with a global presence, specializing in coal sectors. With a diverse portfolio of operating assets in Australia and South Africa, TerraCom stands out as a renowned low-cost producer committed to delivering exceptional outcomes. The company’s focus on high-yielding and diversified assets underscores its dedication to providing value to investors.

The company’s primary supply markets such as Japan, South Korea and India, with consistent forecasted demand to 2023.

In FY2023, the company reported a total ROM Production of 11.5Mt with total coal sales of 8Mt.

✅ Tracking record of paying strong dividend Returns, TerraCom paid 6c in FY23 making it 14.63% Yield stock at the current price 42c. The company paid 78% of the NPAT to its shareholders.

🚩 FY23 Operating EBITDA of A$408m at record coal price per sold tone of A$450. It is important to know that the current coal price is sitting at A$191 per tone.

✅ Despite the current downturn in coal prices, the company remains committed to the payment of dividends to shareholders, According to FY23 report, the dividend payout ratio is between 60% and 90% of net profit after tax. 🚩 We want to see a confirmation in the upcoming 1HFY24.

Outlook for FY2024

Despite the recent coal price drop, the company expects that demand for thermal coal will remain strong in the short and long term. According to research conducted by TerraCom, it is believed that coal is expected to continue to play a critical role in underpinning economic activity and energy security for decades.

As the world decarbonises, TerraCom’s high-quality, high CV thermal coal will likely be one of the last to leave the market. The company expects it will be required throughout the multi-decade transition to at least 2050.

The company is forecasting a small decline in production but the same level of coal sales.

🚩 Recent results in FY24 Q1 showed further decline in ROM and Coal Sales, which combined to lower coal prices during second half of CY23, could negatively affect the company’s NPAT, subsequently its dividend. Traders and Investors need to monitor the estimate NPAT through the EBITDA in order to have an accurate feel of the stock yield.

Technical Analysis

Investors in TER would currently be facing a 56% loss over the past year, indicating a challenging investment performance despite dividend payments. The relative yield of the stock during FY23, with an average price ranging from 75 cents to $1, would have been around 5-6%. Applying the same logic, an anticipated FY24 dividend of 3 cents for the full year, as opposed to the current 6 cents, suggests a fundamentally fair stock price—unless coal prices experience a significant surge, which currently doesn’t seem likely.

Therefore, our outlook on TER suggests two potential scenarios: a breakout above the current resistance level, possibly reaching 55 cents and presenting a 29% trading opportunity; or a re-test of the 30 cents lows. For those considering buying the stock at its current level to capitalise on the next range, we recommend implementing a very tight stop loss to manage potential risks.

We’ve recently secured a 25% profit in Whitehaven Coal Limited. While traders and investors may consider having some exposure to coal, it’s advisable to exercise caution, not overcommit to this sector, and keep consistent track on coal prices. The represented high yield was based on FY23 NPAT, with coal prices lower, FY24 NPAT is likely to be far lower than the previous FY, therefore also reducing the dividend and its yield.

Should I Buy (ASX: TER) Now?

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