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FBR initiates coverage of Peabody Energy with 'outperform' rating

As Peabody Energy Corp. takes the final steps toward emerging from Chapter 11 bankruptcy, FBR & Co. announced it is initiating coverage of the coal producer with an "outperform" rating and a 12-month price target of $33 per share.

"We believe that Peabody shares offer attractive exposure to the domestic thermal and seaborne thermal coal markets, with additional near-term optionality in met coal," FBR analysts Lucas Pipes and Ted Beachley wrote in a March 30 investors note.

A judge approved on March 17 Peabody's plan to reorganize through a $1.5 billion stock sale comprising a $750 million rights offering for bondholders and a $750 million private placement of preferred equity offered to institutional investors.

The plan wiped out more than $5 billion in debt, one of the factors in the analysts' rating. They also cited Peabody's "unique position" as the largest producer in the Powder River Basin, its low-cost Australian thermal coal mines and "a strategic vision geared toward an asset portfolio that can generate cash throughout the cycle."

FBR's price target assumes long-term Powder River Basin prices of $13/ton, Illinois Basin prices of $38/ton and Newcastle thermal coal prices of $60/tonne, as well as metallurgical coal prices of $130/tonne.

The analysts wrote that they expect Peabody to emerge from restructuring with a strong balance sheet showing low levels of net debt and high levels of liquidity. They estimated the value of the company at $5.0 billion, implying a forward 2018E 6.3x EV/EBITDA of $799 million.

"As Peabody looks ahead, it appears to be returning to its roots as a more U.S.-centered coal supplier, which should provide a foundation for long-term returns," FBR said. "In its five-year plan, the company appears focused on maintaining its core portfolio and not reinvesting in higher-cost opportunities."

Peabody's new common equity is expected to start trading April 3 or 4 on the NYSE under the ticker BTU, the report said. The previous shares, traded as BTUUQ, will be extinguished once the company emerges from the bankruptcy process.