Not financial advice. Full disclaimer available here.
JSW quickly took off after the first writing in late October. Whether it’s luck or skill, the stock chart does not lie:
JSW — the largest met coal producer in the EU — beat earnings expectations earlier this week. The company is on track to earn its market cap in 2022, about PLN 6.7bn as of Friday’s close. Profits for the year may be unsustainably high but the balance sheet is definitely a lot stronger as a result. Here is an overview of the financials compared to prior, more difficult, periods:
JSW trades significantly below book value while adjusted net cash exceeds the current market cap. Adjusted net cash = cash - debt & leases + net FIZ assets. FIZ is basically a rainy day fund. The technical term is stabilization closed-end investment fund. This is how the company describes it:
In periods of upswing on the coal markets, the Parent Company intends to transfer a portion of its cash surpluses to FIZ to have them invested. The Company will be able to use the funds accumulated in FIZ in periods of market downturn and/or in periods of negative cash flows generated by the Group.
So JSW is in very good shape and the market is not assigning any value to its future cash flows, at the current share price of PLN 57. This is very attractive because steel is not going away and therefore we need coal.
For 2022 to 2030, management gave the following guidance:
15.6m tons of coal production per year
mining cash cost of 411 [PLN/t]
25% EBITDA margins1
That translates into a ballpark figure of PLN 2.1bn of EBITDA per year.2 Pick a multiple and that’s your exit price. For example, 3 times EBIDTA, which is less than book value in 2020 (when the company had debt), equals a price target of 112. See footnote #3 for the math.3
Since coal is so hated, it’s hard to forecast how far the stock price can go. However, the ridiculously low valuation takes care of the downside.
EBITDA = earnings before interest, tax, depreciation and amortization
PLN 2.137bn = 15.6 x 411 / (1 - 25%) x 25%
Target share price = ( 3 x EBITDA + Adj. net cash ) / share count
112 = ( 3 x 2,137 + 6,783 ) / 117