We are maintaining our Buy recommendation on Houston, TX-based Natural Resource Partners, L.P. (NRP), a master limited partnership engaged mainly in owning and managing coal properties in the Appalachian region, the Illinois basin and the Powder River basin. However, we are decreasing our target price from $40 to $33.50 per unit.
The partnership looks to improve distributable cash flow next year as its lessees have locked in '09 coal production at prices above 08 levels. Its low CapEx requirements, strong cash flow profile and $250 MM of available liquidity should put the partnership in a strong position in 2009.
The partnership will have the option to engage in several unit-holder maximizing investments such as strategic acquisitions, further distribution increases and debt repayments. Although the slowing global growth story will put some downward pressure on coal prices, continued supply issues should help offset decreases in demand for electricity and steel.
On a yield distribution basis, Natural Resource Partners has historically traded around 2.50% or 250 basis points (bp) above the 10-Yr Treasury yield, the benchmark for our risk-free rate. To get our target distribution, we took our estimated yield on the 10-Yr. Treasury, one year from today of 4.25% and added NRP's historical spread of 2.50% to arrive at 6.75%. This is the yield which we believe NRP would trade at in one year.
Based on our model, we believe that the partnership should be able to sustain its consecutive distribution increases through 2009. As such the annualized distribution in one year would be $2.26 per unit ($0.565 x 4), a 7.6% increase from 2008 of $2.10 per unit ($0.525 x 4).
Read the full analyst report on NRP
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