The Whitehaven Coal Ltd (ASX: WHC) share price is expected to offer investors significant upside, according to one broker.
While coal may not be everyone's favourite commodity, Morgan Stanley thinks the business could rise by more than 60% over the next year. The broker has a price target of $7.75 on the company.
Whitehaven describes itself as the leading Australian producer of 'premium-quality' coal.
Further, it says it's the "dominant player" in Australia's only emerging high-quality coal basin. North-west New South Wales is the focus of its capital investment and workforce presence.
It operates four mines – three open-cut mines and one large underground mine in the Gunnedah coal basin. It also has two near-term development assets. Vickery is near Gunnedah in New South Wales, and Winchester South in Queensland's Bowen Basin.
Additionally, Whitehaven has customers across Asia including South Korea, Japan, Taiwan, India, Vietnam, Malaysia, the Philippines, Indonesia and New Caledonia.
Image source: Getty Images
What's causing the bullishness for the Whitehaven Coal share price?
Morgan Stanley's reason for the high price target is that it thinks the coal price will stay stronger for longer. That's thanks to supply and demand factors.
Whitehaven is the broker's pick of the coal sector and it likes the growth potential that the business has.
What's more, Morgan Stanley is expecting a large increase in profit and dividends in FY23. Based on those numbers, the broker is implying the current Whitehaven share price comes with an FY23 dividend yield of 17.5%.
Latest business update
The coal miner said that in the three months to 31 March 2022, it achieved a record average coal price of $315 per tonne for the quarter.
For context, Whitehaven managing director and CEO Paul Flynn explains that coal prices remain well supported in an environment where there's "strong demand and constrained supply".
The three months to 31 March 2022 saw saleable coal production of 4.5mt. This is an increase of 50% on the previous quarter and up 5% year on year.
After buying back $67 million of shares and paying $80 million in dividends in March, it had $161 million of net cash at 19 April 2022.
The company says it's on track to deliver on FY22 guidance. That's despite a tight labour market and COVID-related absenteeism which impacted production and sales.
Outlook for Whitehaven and the coal price
The company points out that sanctions on Russia could mean that the 110 million tonnes of high calorific value seaborne coal from Russia could potentially be excluded from its traditional seaborne markets. That's around 29% of the global market.
After the invasion of Ukraine, "many importing nations are reconsidering energy security and customers have become eager to lock in supply".
Whitehaven says it expects both thermal and metallurgical coal prices to be "well supported" over 2022 and 2023.
Whitehaven CEO Flynn said:
As the developed world re-focuses on the critical importance of energy security, Whitehaven presents a compelling investment thesis.
