Elevator Pitch
I have a Hold rating for Yancoal Australia Ltd (OTCPK:YACAF) [YAL:AU] [3668:HK] shares. My earlier February 28, 2024, update drew attention to a news report regarding its second-largest shareholder Cinda International’s sale of shares in the company, and Yancoal Australia’s full-year fiscal 2023 performance.
My Hold rating for Yancoal Australia remains unchanged after evaluating the company’s stance on capital allocation. It is a good thing that YACAF has the intention and financial capacity to allocate capital to accretive M&A deals. But it is disappointing to know that Yancoal Australia isn’t considering share buybacks for now.
Yancoal Australia’s shares can be traded on the Australian Securities Exchange, the Hong Kong Stock Exchange, and the OTC (Over-The-Counter) market. The company’s OTC shares, Hong Kong-listed shares, and Australia-listed shares boasted three-month average daily trading values of $0.05 million, $10 million, and $15 million, respectively, according to S&P Capital IQ data. Readers can buy and sell the company’s Australia-listed and Hong Kong-listed shares with US brokerages offering international equity trading services like Interactive Brokers.
Spotlight On Cash And Valuations
Yancoal Australia trades at depressed valuations, even though the company is cash rich.
The market is now valuing Yancoal Australia at consensus next twelve months’ Enterprise Value-to-Sales and EV/EBITDA ratios of 0.96 times and 2.4 times, respectively, as per S&P Capital IQ. It is reasonable to consider Yancoal Australia’s valuations as undemanding, taking into account its low-single digit EV/EBITDA multiple and its Enterprise Value-to-Sales metric of close to 1 times.
Yancoal Australia had cash amounting to AUD1.66 billion on the company’s balance sheet as of end-Q1 2024, which represents about a fifth of its market capitalization. Taking into account the AUD429 million dividend that was distributed to shareholders at the end of April, the company’s adjusted cash position is still estimated to be a substantial AUD1.2 billion or around 15% of its market capitalization.
In my opinion, the stock’s valuation re-rating potential is affected by mixed signals regarding the company’s capital allocation approach.
Share Repurchases Aren’t On The Cards For Now
In the preceding section, I had touched on Yancoal Australia’s enticing valuations. As such, it is likely that investors will hope that the company could engage in value-accretive share buybacks to support its stock price.
Unfortunately, Yancoal Australia’s recent management comments suggest that there is a very low probability of the company repurchasing its shares in the near term.
At its Q1 2024 earnings briefing last month, YACAF stressed that “it’s not the time” for “on-market share buybacks” at “the current stage.” The reason is that Yancoal Australia aims to have its Australia-listed shares be included in the “S&P/ASX 200 Index” and “S&P/ASX 300 Index” which has a minimum 30% free float criterion for index inclusion. The company disclosed at its most recent quarterly earnings call that its free float is around 28% now.
It is perfectly reasonable for Yancoal Australia to target index inclusion by avoiding share repurchases, which will decrease its free float. But that also means that the company can’t rely on a key capital allocation lever (i.e. buybacks) to enhance shareholder value.
Watch Out For Potential Inorganic Growth Investments
Yancoal Australia will most probably rely on Mergers & Acquisitions or M&A as the main capital allocation tool to create value for its shareholders, since it is not engaging in share repurchases for now.
YACAF acknowledged at the company’s first quarter results briefing in April that it had considered a potential purchase of BHP’s (BHP) coal mine assets in Queensland, Australia which were put up for sale in 2023, although it didn’t go ahead eventually. There are two positive read-throughs from this disclosure.
Firstly, Yancoal Australia does have the intention to leverage on its substantial cash position to acquire assets and businesses that could boost its inorganic growth prospects.
At its Q1 2024 analyst call, the company emphasized that “we’re always looking for opportunities” and noted that its “cash available puts us in a very strong position if those opportunities arise.” The BHP asset sale was an example of the potential deals that YACAF is constantly reviewing.
Secondly, regulatory hurdles are less likely to be an issue for YACAF’s future M&A deals in Australia.
Yancoal Australia’s top shareholder is Mainland Chinese company Yankuang Energy (OTCQX:YZCAY) (OTCQX:YZCHF). Based on YACAF’s prior conversations with regulators pertaining to the BHP asset sales, it doesn’t seem that regulators will block foreign businesses’ acquisitions of Australian mining assets. YACAF shared at its recent quarterly analyst briefing that “we don’t see any issues within the Australian (M&A) approval system” considering that “preliminary discussions with FIRB” relating to the BNP transaction in the past were “very positive.” FIRB refers to the Foreign Investment Review Board, which “considers some proposed investments” under the country’s “foreign investment framework” according to its website.
In summary, there could be upside pertaining to Yancoal Australia’s future financial performance assuming the purchase of high-quality mining assets materializes.
Concluding Thoughts
I have a mixed opinion of Yancoal Australia’s capital allocation strategy, and this explains why I have stuck to my Hold rating for the name. It is a disappointment that the company isn’t going to engage in share repurchases when the stock’s valuations are depressed. But it is encouraging to learn that the company has an interest in capitalizing on its cash position to buy assets or businesses, which bodes well for its growth outlook.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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