Kendrion — Price increases largely drive revenue growth

Kendrion (AMS: KENDR)

Last close As at 17/07/2024

EUR14.50

0.72 (5.22%)

Market capitalisation

209m

More on this equity

Research: Industrials

Kendrion — Price increases largely drive revenue growth

Kendrion’s Q223 organic revenue growth of 9% was better than the 5% in Q1 despite the slowdown in economic activity in several regions. Gross margin remained under pressure due to cost increases. EBITDA increased slightly year-on-year in Q2 after a decline in Q1, as cost savings offset wage inflation. Despite the short-term uncertainties, Kendrion is positive about its orderbook, which is driven by electrification and clean energy trends. On lower margin estimates, the average of our valuation methods points to a value of €21.5 per share.

Johan van den Hooven

Written by

Johan van den Hooven

Analyst

Industrials

Kendrion

Price increases largely drive revenue growth

H123 results review

Industrial engineering

1 September 2023

Price

€14.32

Market cap

€219m

Net debt (€m) at 30 June 2023

161

Shares in issue

15.3m

Free float

33%

Code

KENDR

Primary exchange

Euronext Amsterdam

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(15.2)

(19.6)

(7.0)

Rel (local)

(9.7)

(19.1)

(114.9)

52-week high/low

€19.60

€13.02

Business description

Kendrion develops, manufactures and markets high-quality actuators for industrial applications (52% of revenues) and automotive applications (48%). The geographical spread of FY22 revenues was Germany 39%, other Europe 30%, the Americas 16% and Asia 15%.

Next events

Q323 results

7 November 2023

Analyst

Johan van den Hooven

+44 (0)20 3077 5700

Kendrion is a research client of Edison Investment Research Limited

Kendrion’s Q223 organic revenue growth of 9% was better than the 5% in Q1 despite the slowdown in economic activity in several regions. Gross margin remained under pressure due to cost increases. EBITDA increased slightly year-on-year in Q2 after a decline in Q1, as cost savings offset wage inflation. Despite the short-term uncertainties, Kendrion is positive about its orderbook, which is driven by electrification and clean energy trends. On lower margin estimates, the average of our valuation methods points to a value of €21.5 per share.

Year end

Revenue (€m)

EBITDA*
(€m)

EPS*
(€)

DPS
(€)

EV/EBITDA
(x)

P/E
(x)

12/21

463.6

55.8

1.39

0.69

8.2

15.1

12/22

519.3

57.4

1.45

0.72

6.7

10.7

12/23e

551.2

61.6

1.37

0.68

6.1

10.5

12/24e

592.1

74.8

2.01

1.01

4.9

7.1

Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Good organic growth despite economic slowdown

Organic revenue growth was 9% y-o-y in Q2 and better than the 5% in Q1. Price increases contributed 6% to growth. Growth was driven by Industrial Actuators & Controls and Automotive, whereas Industrial Brakes, in particular, faced the impact of weaker markets in Germany and China. Gross margin was down 310bp yoy in Q2 with continued impact of price increases, which are passed on to customers at no margin, and also a strong comparison base. Net debt increased by €13m to €161m reflecting net debt/EBITDA of 2.8x, which is within the covenant of <3.25x.

Order book bodes well for long-term growth

Kendrion anticipates the low economic activity levels to persist for the remainder of FY23. It has taken short-term cost measures to protect margins and at the analyst meeting management commented it expects savings of around €1m per quarter. On the other hand, the company is very positive about its order book in Automotive E and Industrial Actuators & Controls and in the next few quarters it will start seven new projects in Automotive E (electric vehicle related) in China. We have left our revenue estimates unchanged but have lowered our EBITDA margin forecasts by 50–80bp for the next three years due to the sustained pressure on gross margin. For the period 2023–25 we expect 6–8% revenue growth per annum and a margin improvement of 300bp to >14% in 2025, driven by operating leverage. Under normal economic conditions, Kendrion could outperform our estimates.

Valuation points at upside

Compared to its peers, Kendrion is valued at an 21% discount based on 2023e EV/EBITDA, but we think that this could diminish over time provided it demonstrates improving growth levels and higher margins. On lowered margin estimates, the average of historical multiples, discounted cash flow and peer comparison points to a value of €21.5 per share (down from €23.0 previously).

H123 results: Better organic revenue growth in Q2

Kendrion’s H123 results showed an improvement in organic revenue growth towards 9% y-o-y in Q2 after the reported 5% in Q1. The largest contributor to growth was higher average sales prices to mitigate the impact of input pressure (ie +6% y-o-y in Q2 after +3.5% y-o-y in Q1). More importantly, volumes were better in the quarter, +3% y-o-y in Q2 versus +1.5% yoy in Q1. Currencies had a negative impact on revenue growth of 1% y-o-y overall, resulting in total revenue growth of 8% y-o-y to €137m in Q223.

Management stated that market conditions deteriorated during H123. This was particularly felt in Industrial Brakes, which has a high exposure to Germany and China. In Germany, business activity fell to its lowest level so far this year. In Q123, economic activity in China was lower due to the sharp rise in COVID-19 infections because of the abandoning of the zero COVID-19 policy. The anticipated recovery afterwards did not occur, with only 0.8% GDP growth between Q1 and Q2. The construction of the new factory in China was finalised in May and all the existing activities were successfully transferred to this new plant, which has been fully operational since the beginning of August. The larger capacity will enable Kendrion to potentially double its local revenues towards €100m within the next three to four years.

Exhibit 1: Kendrion’s Q223 and H123 results

€m

Q222

Q223

Change (%)

H122

H123

Change (%)

Industrial

66.1

69.2

5%

136.1

141.1

4%

Automotive

60.8

67.7

11%

120.7

132.6

10%

Total revenues

126.9

136.9

8%

256.8

273.7

7%

Industrial organic revenue growth

8%

6%

16%

5%

Automotive organic revenue growth

-5%

12%

-4%

10%

Total organic revenue growth

2%

9%

5%

8%

.

Industrial

N/A

N/A

24.4

23.3

-5%

Automotive

N/A

N/A

6.1

6.4

5%

Total EBITDA normalised

13.7

14.0

2%

30.5

29.7

-3%

Industrial

N/A

N/A

17.9%

16.5%

Automotive

N/A

N/A

5.1%

4.8%

Total EBITDA margin

10.8%

10.2%

11.9%

10.9%

.

Exceptionals

(0.3)

(0.1)

(2.4)

(0.2)

EBIT reported

6.4

7.3

13%

14.5

16.3

12%

Net profit reported

3.7

3.7

0%

8.8

8.6

-2%

Net profit normalised

5.3

4.4

-17%

12.9

10.0

-22%

EPS reported (€)

0.25

0.24

-1%

0.59

0.57

-3%

EPS normalised (€)

0.35

0.29

-17%

0.86

0.66

-23%

Source: Kendrion, Edison Investment Research

Industrial (52% of revenues) showed higher organic revenue growth of 6% y-o-y in Q2 versus 3% yoy in Q1, which is explained by the higher increase in average sales prices in Q2. The Industrial Brakes segment was affected the most by the slower economic growth in Germany and China, and reported a modest 2% y-o-y organic revenue growth in Q2. Its products are mostly integrated in electromotors for segments such as robotics and automated warehouses and these market segments were under pressure. According to Kendrion, it did not lose any customers or market share. Industrial Actuators & Controls on the other hand experienced a strong quarter with 11% yoy organic revenue growth, with positive markets for aircraft products, electrical distribution, beverage dispensing systems, laser shutters and inductive heating systems, which more than offset the weaker textile manufacturing segment.

Automotive (48% of revenues) further recovered on the back of higher passenger car registrations. According to management, the commercial vehicle segment is stable and the electrification transition will take longer compared to cars. Revenues in Automotive rose 11% y-o-y in Q2 with organic growth of 12% (vs 8% growth in Q1). The acceleration in growth was driven by the stronger growth in the Automotive E segment (electric vehicle related), reporting 30% organic revenue growth in Q2 versus 7% in Q1. Growth was driven by existing suspension and sound systems. Automotive Core (combustion engine related) reported 7% organic growth, broadly the same level as in Q1.

Exhibit 2: Kendrion’s segment revenues in Q223

Revenues, €m

Q222

Q223

Change

Change currencies

Change organic

Industrial Brakes

36.0

36.0

0%

-2%

2%

Industrial Actuators & Controls

30.1

33.2

10%

-1%

11%

Automotive Core (combustion related)

46.6

49.2

6%

-1%

7%

Automotive E (electric vehicle related)

14.2

18.5

30%

0%

30%

Source: Kendrion

The pressure on gross margin continued in Q2, as Kendrion is passing on the higher input prices to customers at no margin and the higher margin Industrial activities showed lower revenue growth in Q2 than Automotive. Gross margin declined 310bp y-o-y to 45.8% in Q2 after a decline of 260bp in Q1. We note that the comparison base in Q223 was stronger as Q222 gross margin was up 80bp despite input pressure.

Normalised EBITDA increased 2% y-o-y to €14.0m in Q222, with gross profit up 1% and opex below last year’s level (with cost savings offsetting wage inflation). The EBITDA margin was 60bp yoy lower at 10.2% after the decline of 140bp in Q1. According to Kendrion, half of the decline in EBITDA margin was caused by the effect of price increases. In Automotive, there was sustained high usage of outsourced development services. Kendrion is relatively optimistic about the development of gross margin going forward, as price increases resulted in a relatively better gross margin towards the end of Q2, although still below last year’s level. In H123, normalised group EBITDA declined 3% y-o-y with Industrial’s EBITDA margin down 140bp to 16.5%, while Automotive kept margins relatively stable at around 5%.

Free cash flow in H123 was a negative €12.5m, evenly split over the quarters. Capex was again higher than depreciation and other negative items were the settlement of the German tax audit (€2.5m combined with restructuring charges) and the seasonally negative working capital. Last year, Kendrion had buffer stocks to secure delivery of materials given the constrained supply chain but in the analyst call management commented it does not have any material buffer stocks anymore. Due to the seasonal positive free cash flow in H2 and lower capex, management expects a significant reduction in net debt by year-end. At the analyst meeting, the company stated it expects a positive free cash flow for the year, which hints at a net debt reduction of at least €12.5m in H2.

In Q2, net debt increased by €13m to €161m versus Q1, mainly due to the cash portion of the dividend payment of €7m and a negative free cash flow of €6m. Net debt/EBITDA increased by 20bp to 2.8x on an annualised basis versus Q1, which is within the covenant of below 3.25x.

Positive order backlog despite economic slowdown

Kendrion expects the lower economic activity levels to persist for the remainder of FY23. It has taken short-term cost measures, including short-term work in Germany, which according to management could deliver savings of around €1m per quarter. Kendrion is positive about its order book and in the next few quarters seven new projects in Automotive E will be ramped up in China. According to Kendrion, its pipeline for Automotive E is developing positively, particularly in suspension and smart actuation. Looking at the global market for active suspension production, IHS Markit expects a CAGR of 13% in the semi active damping segment and 15% in the air suspension market for the period 2022–28, which offers great growth opportunities for Kendrion. The order book for Industrial Actuators & Controls is also solid, with continued interest in new products such as industrial locks (for washing machines and refrigerators), inductive heating and valve products. Price increases will continue to mitigate the input pressure, but management did not provide any guidance regarding the extent of price increases. We still assume an effect of 5% yoy for H223.

On 29 August, Kendrion issued a press release communicating that it identified a cyber security incident and the company cannot rule out that the unauthorized party has obtained data from its systems. Kendrion took immediate action and contingency planning is in place to continue operations. It is currently too early to assess the potential impact of the incident.

Assuming a return to a more stable economic environment in the next few years, Kendrion remains committed to its medium-term targets for 2019–25: organic revenue growth of at least 5% on average per year, an EBITDA margin of at least 15% in 2025 (11.1% in FY22) and a return on invested capital of at least 25% in 2025 (FY22: 15.6%).

We have left our revenue forecasts unchanged for the next three years but have lowered our EBITDA margin estimates due to the sustained negative impact of input pressure. Previously, we assumed that cost savings would more than compensate for the input pressure, but so far this year that has not happened. Margin development in the second half should be better compared to the first half, as management communicated that further price increases will be implemented and at the end of Q2 the gross margin was developing positively (although still lower compared to last year).

For FY23–25, we still expect revenue growth of 6–8%, driven by the energy transition and accelerating electrification, with new projects ramping up and an anticipated further recovery in automotive. Our current estimates are below the company’s ambition for the period until 2025 and Kendrion will understandably need normal economic conditions to deliver higher growth levels.

We have lowered our FY23 EBITDA margin estimate by 80bp to 11.2% with the expectation that operating leverage will push margins up to more than 14% in 2025. We note that also for the profitability target for 2025, Kendrion will need a return to normal economic conditions to achieve its >15% EBITDA level in 2025.

Exhibit 3: Change in estimates

€m

2023e

2024e

2025e

Old

New

Change

Old

New

Change

Old

New

Change

Revenue

551.2

551.2

0.0%

592.1

592.1

0.0%

639.1

639.1

0.0%

EBITDA normalised

65.9

61.6

-6.5%

78.6

74.8

-4.8%

94.0

91.0

-3.2%

EBITDA margin

12.0%

11.2%

13.3%

12.6%

14.7%

14.2%

EBITA margin

7.4%

6.6%

8.9%

8.3%

10.6%

10.1%

Net profit adjusted

23.9

20.8

-13.1%

33.5

30.7

-8.2%

44.5

42.3

-4.9%

EPS adjusted (€)

1.58

1.37

-13.5%

2.22

2.01

-9.2%

2.94

2.77

-5.8%

DPS (€)

0.79

0.68

-13.5%

1.11

1.01

-9.2%

1.47

1.39

-5.8%

Source: Edison Investment Research

Upside in valuation

We use three different valuation methods to value Kendrion: historical multiples, discounted cash flow (DCF) and peer comparison (for more details see our outlook report).

Historical valuation: based on our forecast 2023e EV/EBITDA multiple, Kendrion is trading at a discount of 27% compared to its historical valuation of 8.4x. As Kendrion’s EBITDA margin development is slower than we had anticipated and the current level is below its 10-year average, we think that a discount of 10% to its historical valuation is justified (previously the valuation was in line). This assumption gives a value per share of €20.2 (down from €21.9 per share previously).

DCF valuation: we have left our assumptions unchanged and are still using a WACC of 8.4%. On our slightly lower estimates, particularly at the margin level, our DCF now indicates a fair value per share of €23.4, versus €24.8 previously.

Peer group comparison: we have not changed our assumption that a valuation in line with Kendrion’s peers is merited based on the 2023e EV/EBITDA multiple, versus the current discount of 21%. This assumption delivers a value per share of €20.9, down from €22.3.

The unweighted average of these valuation methods points to a valuation of €21.5 per share (previously €23.0).

Exhibit 4: Valuation methods for Kendrion

Valuation method

Edison assumptions

Equity value per share (€)

Historical valuation

2023e EV/EBITDA at discount of 10% to historical multiples

20.2

DCF

Terminal growth 1.5%, terminal EBITA margin 7.5%

23.4

Peer group

2023e EV/EBITDA in line with peers

20.9

Average value per share

21.5

Current share price

14.3

Source: Edison Investment Research


Exhibit 5: Financial summary

€m

2020

2021

2022

2023e

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

396.4

463.6

519.3

551.2

592.1

639.1

Gross Profit

191.0

225.8

249.3

259.5

281.7

307.2

EBITDA normalised

44.6

55.8

57.4

61.6

74.8

91.0

EBITDA reported

40.2

51.7

(6.6)

61.5

74.8

91.0

Depreciation & Amortisation

(25.7)

(23.9)

(23.3)

(25.3)

(25.8)

(26.5)

EBITA normalised

18.9

31.9

34.1

36.3

49.0

64.6

Amortisation of acquired intangibles

(4.4)

(3.9)

(4.7)

(3.5)

(3.5)

(3.5)

Exceptionals (Edison definition)

(4.4)

(4.1)

(64.0)

(0.1)

0.0

0.0

EBIT reported

10.1

23.9

(-34.6)

32.7

45.5

62.1

Net Interest

(4.4)

(3.7)

(5.1)

(7.7)

(6.6)

(6.0)

Participations

0.0

(0.1)

0.0

0.0

0.0

0.0

Profit Before Tax

5.7

20.1

(39.7)

25.0

38.9

56.1

Reported tax

(1.4)

(5.7)

(6.6)

(6.9)

(10.8)

(15.4)

Profit After Tax

4.3

14.4

(46.3)

18.1

28.1

40.7

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

11.7

20.6

21.7

20.8

30.7

42.3

Net income (reported)

4.3

14.4

(46.3)

18.1

28.1

41.7

Average number of shares (m)

14.8

14.8

15.0

15.2

15.3

15.3

Total number of shares (m)

14.9

14.9

15.1

15.3

15.3

15.3

EPS normalised before amortisation (€)

0.79

1.39

1.45

1.37

2.01

2.77

EPS reported (€)

0.29

0.97

(3.09)

1.19

1.84

2.73

DPS (€)

0.40

0.69

0.72

0.68

1.01

1.39

Revenue growth

-3.9%

17.0%

12.0%

6.1%

7.4%

7.9%

Gross Margin

48.4%

48.3%

48.1%

47.1%

47.6%

48.1%

EBITDA Margin

11.3%

12.0%

11.1%

11.2%

12.6%

14.2%

Normalised Operating Margin

4.8%

6.9%

6.6%

6.6%

8.3%

10.1%

BALANCE SHEET

Fixed Assets

299.6

324.5

278.5

280.3

283.0

286.8

Intangible Assets

159.1

183.4

126.5

125.6

124.6

123.7

Tangible Assets

118.7

121.9

131.6

134.3

138.0

142.7

Investments & other

21.8

19.2

20.4

20.4

20.4

20.4

Current Assets

129.5

166.3

198.1

201.0

217.6

240.8

Stocks

61.7

79.7

85.1

90.3

96.4

103.4

Debtors

47.2

56.8

58.8

66.2

71.1

76.7

Other current assets

7.6

11.2

16.4

17.8

19.2

20.7

Cash & cash equivalents

13.0

18.6

37.8

26.7

30.9

40.0

Current Liabilities

87.9

97.6

104.8

111.8

123.4

137.1

Creditors

44.0

51.6

54.9

55.4

59.5

64.2

Other current liabilities

31.9

33.2

38.4

39.9

42.5

45.4

Short term borrowings

12.0

12.8

11.5

16.5

21.5

26.5

Long Term Liabilities

137.8

170.2

196.8

186.8

176.8

166.8

Long term borrowings

104.2

136.4

166.6

156.6

146.6

136.6

Other long term liabilities

33.6

33.8

30.2

30.2

30.2

30.2

Shareholders' equity

203.4

223.0

175.0

182.7

200.4

223.7

Balance sheet total

429.1

490.8

476.6

481.3

500.6

527.6

CASH FLOW

Op Cash Flow before WC and tax

40.6

54.6

52.1

61.5

74.8

91.0

Working capital

5.4

(17.4)

(4.9)

(12.0)

(5.7)

(6.5)

Tax

(1.3)

(6.2)

(5.2)

(6.9)

(10.8)

(15.4)

Net interest

(2.9)

(3.2)

(4.1)

(7.2)

(6.6)

(6.0)

Net operating cash flow

41.8

27.8

37.9

35.4

51.8

63.2

Capex

(16.0)

(30.0)

(37.7)

(30.6)

(32.1)

(33.7)

Acquisitions/disposals

(78.2)

(18.8)

(0.2)

0.0

0.0

0.0

Equity financing

0.0

0.0

0.0

0.0

0.0

0.0

Dividends

0.0

(4.3)

(7.1)

(10.9)

(10.4)

(15.4)

Other

(3.4)

(2.1)

(2.6)

0.0

0.0

0.0

Net Cash Flow

(55.8)

(27.4)

(9.7)

(6.1)

9.2

14.1

Opening net debt/(cash)

47.4

103.2

130.6

140.3

146.4

137.2

Closing net debt/(cash)

103.2

130.6

140.3

146.4

137.2

123.1

Source: Kendrion, Edison Investment Research


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United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Cadence Minerals — Sonora project update

Cadence Minerals has provided an update on the status of the Sonora lithium project in Mexico. The company holds a 30% interest in seven project concessions through the JV entities Mexilit and Megalit, which are majority controlled by Ganfeng. Following the amendments to the Mexican mining law introduced in April and May 2023, the General Directorate of Mines (DGM) issued a formal notice indicating that all lithium concessions underpinning the Sonora project were cancelled, citing a lack of sufficient disclosure regarding the minimum investment obligations. Both Ganfeng and Cadence believe that the required obligations were met in full and sufficient evidence was provided to the Mexican authorities. The decision is not final and is subject to ongoing appeals. While the news is somewhat disappointing, we note that Sonora represents a relatively small part of our valuation of Cadence, which is driven by the Amapá iron ore project.

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