Granite City Agreement And GPI Delays Will Pose Future Challenges

Key Takeaways

• The Granite City agreement’s reduced benefits and unresolved GPI project could temporarily challenge SunCoke’s revenue and margin growth.
  
• Expansion in logistics and favorable regulatory changes suggest improved future earnings through increased capacity and reduced legacy expenses.
  
• Extended agreements, reduced liabilities, strong logistics performance, and expansion plans contribute to SunCoke Energy’s revenue growth and financial stability.

Catalysts

Operates as an independent producer of coke in the Americas and Brazil.

• The extension of the Granite City coke supply agreement with U.S. Steel, despite reduced tonnage and lower economics, could impact SunCoke’s future revenue and margins by providing a temporary bridge during government delays, indicating near-term challenges in volume and profitability from this segment.
  
• The $12 million expansion project at the KRT Logistics facility, increasing barge-to-rail unloading capacity from 2 million to 5 million tons per year, suggests future revenue growth through higher volumes and potential new business opportunities in logistics.
  
• The regulatory exemption from the Department of Labor regarding legacy black lung liabilities, resulting in a $9.5 million gain, will lower future legacy expenses and reduce year-to-year volatility, potentially improving net margins and earnings stability.
  
• The favorable logistics performance and higher volumes at domestic terminals, including a new 3-year barge-to-rail contract, indicate expected improvement in logistics revenue and EBITDA for SunCoke, driving future earnings growth.
  
• The unresolved GPI project, affected by delays in government approval of U.S. Steel's sale, may hinder revenue growth in the short term, but the strong project fundamentals suggest potential longer-term positive impacts on cash flows once resolved.

SunCoke Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SunCoke Energy's revenue will decrease by -12.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.4% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $51.6 million (and earnings per share of $0.62) by about December 2027, down from $86.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.4x on those 2027 earnings, up from 11.3x today. This future PE is greater than the current PE for the US Metals and Mining industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

SunCoke Energy Future Earnings Per Share Growth

Risks

• SunCoke Energy successfully extended its Granite City coke supply agreement with U.S. Steel, which, despite reduced tonnage and lower economics, provides assured revenue and operating stability until mid-2025, impacting revenue positively.
  
• The elimination of a significant portion of legacy federal black lung liabilities through a regulatory exemption also reduces future expenses and financial volatility, positively impacting net margins.
  
• Strong performance in SunCoke's Logistics segment, marked by new agreements and increased volumes, leads to higher logistics adjusted EBITDA and supports overall earnings.
  
• The planned $12 million expansion at the KRT Logistics facility is expected to significantly increase capacity and future revenue once completed, potentially enhancing earnings.
  
• Continued financial health is evident from SunCoke's liquidity position—with $514.7 million total liquidity and an undrawn $350 million revolver—providing flexibility for strategic investments and potentially impacting financial stability positively.

Valuation

• The analysts have a consensus price target of $12.0 for SunCoke Energy based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.3 billion, earnings will come to $51.6 million, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 8.2%.
• Given the current share price of $11.51, the analyst's price target of $12.0 is 4.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.