Currency in AUD
Last close As at 28/03/2023
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Research: Metals & Mining
Allkem is uniquely positioned to be one of the main beneficiaries of the favourable lithium market conditions as it boasts a healthy pipeline of advanced development projects, aiming to triple its production capacity and to expand into the higher value battery-grade products. Despite near-term economic weakness, lithium demand continues to be driven by the secular trend towards decarbonisation and growing global electric vehicle (EV) adoption. Supported by supply shortages, cost inflation and project delays, lithium prices should remain at elevated levels to incentivise new supply. Despite adding c 45% year to date, Allkem shares trade at a FY23e consensus EV/EBITDA multiple of only 5.6x versus the downstream peers’ average of 9.6x.
Allkem |
Moving up the value chain
Metals and mining |
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1 November 2022 |
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Allkem is uniquely positioned to be one of the main beneficiaries of the favourable lithium market conditions as it boasts a healthy pipeline of advanced development projects, aiming to triple its production capacity and to expand into the higher value battery-grade products. Despite near-term economic weakness, lithium demand continues to be driven by the secular trend towards decarbonisation and growing global electric vehicle (EV) adoption. Supported by supply shortages, cost inflation and project delays, lithium prices should remain at elevated levels to incentivise new supply. Despite adding c 45% year to date, Allkem shares trade at a FY23e consensus EV/EBITDA multiple of only 5.6x versus the downstream peers’ average of 9.6x.
FY22 defies economic and equity markets gloom
Allkem enjoyed a stellar performance in FY22 (to June 2022) as its two producing operations, Olaroz and Mt Cattlin, benefitted from robust production results and record lithium prices. As a result, the company’s revenue grew 9x to US$770m and EBITDA jumped 171x to US$513m, an impressive margin of 67% that was also assisted by stringent cost control. With lithium prices hovering near record levels (c US$75/kg China carbonate spot), and the company guiding to a Q223 contract carbonate price of US$50/kg (vs US$23.4/kg in FY22 and US$43.2/kg in Q1), Allkem remains firmly on a growth path. Consensus expectations currently point to a near doubling of FY23e EBITDA to US$1,056m.
Lithium production capacity to triple by 2026
Despite the current economic headwinds, the longer-term EV and lithium industry fundamentals remain intact, underpinned by ambitious global climate and decarbonisation targets. Thanks to its robust pipeline of advanced development projects, Allkem emerges as one of the main beneficiaries of the favourable market conditions as it aims to triple its production capacity by 2026. Importantly, the company continues to move up the value chain as its Naraha hydroxide facility is being commissioned and the battery-grade lithium Sal de Vida project is under construction. Allkem has a strong balance sheet with Q123 cash of US$664m.
Growing downstream exposure warrants premium
Trading at a consensus FY23e EV/EBITDA of only 5.6x, Allkem is valued at a multiple that is more appropriate for an upstream lithium producer (c 5x) rather than a diversified business with growing exposure to battery-grade downstream operations (c 10x). While execution and country risks could weigh on the stock, as Allkem continues to move up the value chain, we believe its valuation gap to the industry leaders such as Albemarle (Y1 EV/EBITDA of 10.3x) should start to close.
Historical financials and consensus estimates
Source: Allkem, Refinitiv |
EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.
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Research: TMT
EML Payments has announced that due to concerns raised by the UK regulator, the Financial Conduct Authority (FCA), it will temporarily cease onboarding new customers in relation to its UK subsidiary Prepaid Financial Services Limited (PFS UK). Concerns are similar in nature to those raised by the Irish regulator relating to PFS’s Irish subsidiary and should be addressed as part of the remediation programme that is currently underway. The cap on new business is likely to reduce FY23 revenue by up to c 2% and to resolve the issue, is likely to require additional compliance and risk management expenditure; we maintain our forecasts pending the update on the strategic review due on 25 November.
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