No Russian Gas for Poland – Investment Ideas

EU will reduce Russian gas consumption. Done deal. Only question how quickly this will happen. Russian stop of gas for Poland and Bulgaria may indicate that this may be quick. How to trade this? I am sure there are many trades. The first that comes to mind are LNG shipping and coal. I wrote here several times about LNB shipping idea – see the older posts. I focus today on Polish coal.

Polish Coal

Coal stocks are very cheap. Especially Polish coal stocks.

Coal prices have doubled last year and doubled again in 2022. The EU ban on Russian coal that comes into effect in Q3 is pushing coal prices further. Russia exports USD5 billion of coal to EU. And finally the threat of Russian gas supplies also helps and will help coal prices. We see very interesting coal prices prospects.

Source Trading Economics

We are long Polish coal mine JSW. The JSW Group is the largest producer of high quality hard coking coal in the European Union and one of the leading producers of coke used for smelting steel. SEE:

JSW will generate EBITDA equal to its market capitalization in 2022

I spoke to IR last week. Below is a summary of what they said and my valuation assessment of this:

  • In 2021 JSW sold 13.8 mil tons of coal. They expect 14.5 mil tons for 22
  • They had a very strong 2021Q4 – if you annualize Q4 numbers into a fully year – JSW is trading at just 1.2 EV/EBITDA. Very cheap for the largest EU coking coal producer. I enclose the valuation table below.
  • Last week the company has announced its Q1 trading report (see the website). 1Q22 was the best quarter for many years:
    • coal volumes sold up 6% qoq
    • average selling price in USD up 24% qoq
    • PLN down by 2% qoq
    • implied revenue growth in PLN 34% qoq
  • The increase in realized coal prices should flow through the Profit and Loss and increase EBITDA, and profits.
  • The coal price effect should increase EBITDA in PLN by 27%.
  • I assume a quarterly reduction of EBITDA due to energy costs inflation by 7%. The number is arbitrary. You can plug your own number into the below model to see the impacts.
  • Under the above assumptions 1Q22 EBITDA should increase by around 20% vs 4Q21.
  • I annualized the estimate 1Q22 EBITDA to get an 22 annual EBITDA. At the current share price JSW trades at EV/EBITDA22 of 1.0. Very cheap.
  • Q2 and Q3 should be even better.
  • The reason is how pricing is done. They fix prices on a quarterly basis. For example, if you want to model the average price for 22Q2, you take an average of 5 months before the Q2 (Nov21-March22) and discount it by 10%.
  • So today’s high prices will affect their Q3 and Q4 figures. You have a good pricing visibility.

Back of the envelope valuation table

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The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.

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