Category: Financial Markets
Investment Thesis:
- Energy margins bottom out and could potentially start to improve (higher customer and volume numbers).
- Strong cash flow business which provided flexibility to deploy cash in growth opportunities and capital management.
- On-going focus on costs and digitalization should support margins.
- Potential capital management initiatives (e.g., buyback).
- Demerger into AGL Australia and Accel may unlock shareholder value.
- Potential favorable changes to the regulatory environment.
- Potential M&A – AGL has already received a takeover bid at $7.50 per share which was rejected by the AGL Board.
Key Risks:
- Competitive pressures leading to margin erosion.
- Cost pressure and fuel supply issues lead to margin erosion.
- Increase in supply leading to depressed prices.
- Regulatory risk (policy uncertainty), such recent regulation in electricity markets [ Victorian Default Offer (VDO) and Default Market Offer (DMO)].
- Unscheduled shutdowns impacting earnings.
Key Highlights:
- Underlying EBITDA declined -27% YoY to $1.22bn and underlying NPAT declined -58% YoY to $225m, reflecting the expected step down in Trading and Origination Electricity earnings due to lower realized contracted and wholesale customer prices, increased costs of capacity to cover periods of peak electricity demand, absence of the Loy Yang Unit 2 insurance proceeds recognized in FY21, increased residential solar volumes and margin compression via customer switching.
- Net cash from operations declined -2% YoY to $1.227bn with lower underlying EBITDA partially offset by a strong working capital outcome which saw cash conversion improve +27% YoY to 123%, however, management warned of a hit to cash conversion rate in FY23.
- Capital management. Strong balance sheet with net debt declining -11.2% to $2,662m, reducing gearing by -590bps to 29.2%, giving company significant headroom to debt covenant of gearing <50%.
- Board declared a final unfranked dividend of 10cps, equating to total FY22 dividends of 26cps, down -65% YoY and equating to a payout ratio of 75% vs 87% pcp.
- Opex savings target exceeded. The Company saw opex (excluding D&A) decline -7.6% YoY as management delivered FY22 recurring savings of ~$158m (vs target of $150m), including initial benefits from structural review and reduction in corporate costs. However, management warned that it expects a small step up in operating costs for FY23, albeit being lower than CPI after adjusting for the non-recurring benefits in FY22.
- Outlook. Management announced it will provide FY23 guidance in late-September in conjunction with the initial outcomes of the review of strategic direction, however, expects FY23 earnings to remain resilient amidst the current challenging in the energy industry and market conditions, underscored by the strength of AGL’s large and diversified customer base, low-cost baseload generation position supported by strong fuel supply arrangements, robust risk management, with prudent margin management ensuring retail strength and stability in a highly volatile market, with the Company largely hedged for FY23 and well positioned from FY24 to benefit from sustained higher wholesale electricity pricing (Refer to Figure 4 for forward pricing curve) as historical hedge positions progressively roll-off.
Company Description:
AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.
(Source: Banyantree)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Investment Thesis:
- Strong and solid fundamentals with robust lithium demand and prices to persist. As expected, lithium demand growth to support pricing and be driven by: (1) long lead times for lithium mines and hence potential short-term supply constraints; and (2) growth in new electric vehicle and hybrid vehicle sales especially in China.
- High quality assets operated by a solid management team with appropriate expertise.
- Expansion of Olaroz is expected to significantly increase capacity of lithium carbonate, resulting in strong cash flow generation.
- Improving production and operational efficiency at Mt Cattlin in the short term should result in significant cash flow generation.
- Development of Sal de Vida, as the asset could add more than $3.40 per share to AKE’s value.
- Development of the James Bay lithium pegmatite project in the long term.
- Solid balance sheet.
Key Risks:
- Commodity price volatility. There is no formal market for lithium with the pricing of lithium products determined by private negotiation between producer and end user.
- AUD/USD movement. Prices for lithium products are denominated in US dollars, so earnings translation into Australian dollars can be affected by wide fluctuations US/A$ cross rate.
- Adverse weather impacts. The Company’s projects are located in areas that can be subjected to severe weather events such as snow falls, which may adversely impact the company’s operations and earnings. Lack of exploration success. Despite AKE already successfully identifying resources and reserves, geological complexities may arise that may inhibit the future inclusion of further resources and reserves.
- Metal processing issues. Any issues with the metallurgical processing equipment may impact the company’s earnings.
- Stability of government policy. Whilst the political climate where AKE assets are based are currently stable, to remain cognizant of any changes especially nationalization of assets and increased taxes. Moreover, the VAT refund received by AKE.
- Execution risk/processing issues. Any issues with the pond’s system, processing or execution risks may impact the company’s earnings.
Key Highlights:
- Relative to the pcp and in US$: Despite the ongoing impacts of Covid-19, revenue of $769.8m was driven by record annual production volumes and operating profits at Mt Cattlin and Olaroz, improved and higher prices, strong cost control, and the merger with Galaxy Resources. Olaroz contributed $292.8m, whilst Mt Cattlin (in 10-months), added $451.9m in revenue.
- Mt Cattlin saw record revenue from sales of 200,715 dry metric tons (dmt) of spodumene concentrate at an average price of $2,221/tone CIF2 for the period from 25 August 2021. Gross cash margin of 80%.
- AKE achieved record revenue from Olaroz, up +341% to $293m on sales of 12,512 tons of lithium carbonate with average pricing increasing by 370% to $23,398/t FOB4. The gross profit margin was 82%.
- EBITDAIX of $513.1m and consolidated NPAT of $337.2m (versus net loss of $89.5m in FY21). NPAT includes one off charges of $12.8m for Galaxy acquisition costs, an inventory uplift on purchase price allocation related to the merger of $12.4m, $13.4m related to amortization of customer contracts due to purchase price allocation, gains of $32.0m from financial instruments, and foreign exchange losses of $9.6m. Net finance costs were $13.8m.
- Net assets increased to $3,081m as at FY22- end (vs $725m at FY21-end) including cash balances of $664m (vs $258m in FY21). The increase in net assets and cash of $2,356m and $406m was due to the Galaxy merger transaction.
- Management highlighted strong cash generation and existing cash balance is expected to fully fund development projects. Total capex totalled $261.4m (vs $97.6m in FY21) and the Mizuho Stage 1 and Pre-export loan facilities were reduced by ~$33.7m.
- Development Highlights. Olaroz Stage 2 reached over 91% completion and first production remains anticipated for late 2H CY22. Management stated, “successful completion of this project will deliver material new production from H2 FY23 onwards”.
- Construction of the Naraha lithium hydroxide plant in Japan was completed, with first production expected in early 4Q CY22. Management expects that once product qualification is complete, this plant will provide AKE with exposure to the high value lithium hydroxide market.
- Construction at Sal de Vida began in January 2022, with first production expected by 2H CY23.
- Feasibility Study and Maiden Ore Reserve for James Bay was released in December 2021.
Company Description:
Allkem Ltd (AKE), was formed following the merger of ASX-listed lithium AKE operates as a specialty lithium chemicals company with lithium brine and borax operations in Argentina, a hard-rock lithium operation in Australia and a lithium hydroxide conversion facility in Japan.
(Source: Banyantree)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
