Does a P/E of 2x and dividend yield of over 10% make Whitehaven shares a bargain buy?

On paper, Whitehaven Coal Ltd (ASX: WHC) shares appear to be among the cheapest you will find on the Australian share market.

According to recent notes out of Bell Potter and Goldman Sachs, their analysts are expecting the coal miner to deliver earnings per share of $2.98 and $2.92, respectively, in FY 2023.

So, with Whitehaven Coal shares currently changing hands for $7.07, this means they are trading at just 2.4x forward earnings.

In addition, over the last 12 months, the miner has paid total fully franked dividends of 72 cents per share. This means its shares have a trailing dividend yield of just over 10%.

Are Whitehaven Coal shares a bargain buy?

First things first, let’s address the elephant in the room. That is the P/E ratio.

This ratio is not one that is traditionally used when valuing ASX mining shares. Therefore, if you are basing your valuation of the coal miner on this metric, you could find yourself seriously overvaluing its shares.

Goldman Sachs use a combination of net asset value and enterprise value to EBITDA for its valuation model.

Over the next 12 months, the broker expects EBITDA of $1,549 million. Based on a 2.5x multiple, which it feels is fair for the coal miner, this gives it an initial value of $3,874 million. Then, combined with its cash, the company has an equity value of $6,528 million or $7.84 per share according to Goldman.

The broker also estimates that the company’s net asset value is $6,302 million or $7.44 per share. So, if we equally weigh these valuations, we will end up with $6,415 million or $7.80 per share. Which is Goldman’s price target for Whitehaven Coal shares.

So, based on that, you can see that the company’s shares are not a bargain but could be classed as good value. This explains why the broker only has a neutral rating on them.

What about the massive dividend yield?

It is worth remembering that a trailing dividend yield refers to what has already been paid and not what is expected to be paid in the future.

Goldman is expecting dividends per share of 37 cents in FY 2024. This equates to a fully franked 5.2% dividend yield. So, while this is still an above-average yield, it is almost half of the trailing yield.