Stock pick – Exxaro

Ashraf Mohamed from Cornerpiece Capital said Exxaro is a good investment in an inflationary environment as investors move their funds to alternative investments like commodities.

Exxaro Resources is a coal and heavy minerals mining company in South Africa that sells coal to Eskom, other local buyers, and offshore markets.

It also invests in iron ore and zinc mining companies and has operations and offices in Africa, Asia, Europe, and Australia.

Exxaro fully acquired Cennergi in April 2020, giving the company access to renewable energy initiatives.

Cennergi currently has two wind farms with a total generation capacity of 229 MW – the Amakhala Emoyeni Wind Farm (134 MW) and the Tsitsikamma Community Development Wind Farm (95 MW).

Cennergi also received the approval to construct an 80 MW solar plant in Lephalale called the Lephalale solar project.

Mohamed said that China recently announced the construction of five new coal power stations, and India also continues to use coal power.

He explained that there is no new coal supply that will be able to meet the demand. It means coal prices will increase, which would benefit Exxaro.

In addition, Europe has outsourced its energy supply to Russia for the past decade.

Since the Russian-Ukraine war, Russia has steadily been cutting energy supply to Europe due to the sanctions imposed on Russia. Europe is now in the midst of a major energy crisis.

France, Italy, Austria, the Netherlands, and Germany are reopening previously closed coal power plants in response to the Russian energy cuts.

It has the potential to benefit Exxaro as coal shortages may need to be met with South African supplies.

Exxaro’s share price had a very strong year. It increased from R155.30 to R231.69 year-to-date – a 49.20% return – on the back of the surging coal prices.

Exxaro’s profitability has also benefitted from the increase in energy prices, with its net profit margin improving from 25.18% in 2021 to 38.65% in 2022.

If the global coal supply cannot meet the growing demand, Exxaro’s profitability may improve even further.

In its latest results, Exxaro managed to increase its revenue by 48% and net profits by 4% year-on-year.

Exxaro is a strong dividend payer. It delivered an average dividend growth rate of 15.4% over the last ten years.

Exxaro has a dividend yield of 14.04% at the current share price based on its trailing 12-month dividend payments at a payout ratio of 0.62.