TSLA - Albemarle: Time To Start Digging

2023-03-31 14:40:18 ET

Summary

• Investors in Albemarle scrambled out of ALB recently as fears mounted over the unrelenting slump in lithium carbonate prices in China, plummeting by almost 35% in the last month.
• In our previous article, we cautioned investors to remain vigilant for any potential deceleration in adjusted EBITDA growth. It appears that ALB's recent price action has likely factored this in.
• NEV sales data improved in February, indicating that price cuts boosted sales momentum. The worst of the decline in lithium prices is also expected to be over.
• ALB's valuation has moved to attractive levels, suggesting an opportunity to buy seems reasonable.

Albemarle Corporation (ALB) investors are used to upward/downward volatility, given its nascent opportunity in the renewable energy supply chain, focusing on its energy storage growth drivers.

The leading lithium mining company is a fully integrated lithium producer that posted record profitability in FY22 as lithium prices surged to record highs.

Its recently rejected bid for Liontown Resources suggests that Albemarle is confident of its long-term growth drivers in the space as it looks to achieve a production capacity of up to 600K metric tons by 2030.

Its proposed acquisition would have given it access to Kathleen Valley, which has a conversion capacity of " roughly 375,000 metric tons per year of lithium chemicals on a lithium carbonate equivalent basis."

As such, we encourage investors to watch the developments closely. For now, the market has yet to react to ALB's bid based on its price action. However, downside volatility should be expected if it overpays substantially for the opportunity.

ALB fell nearly 30% from its January highs toward its recent March lows as investors reacted to the steep pullback in lithium carbonate prices in China. Accordingly, it has continued to fall this week, reaching RMB 238K per ton. Notably, prices were more than RMB360K per ton in early March, declining by nearly 35% over the past month.

Albemarle management discussed the recent developments in China in a late February conference. The company highlighted that while the " spot market for lithium is down, the whole supply chain remains tight."

The company maintained its confidence that "demand is expected to pick up in China," helping to mitigate the fall in prices. Notably, China's NEV sales data in February showed that the price cuts have helped to improve the recovery cadence.

Accordingly, China's retail NEV sales increased by 61% YoY and 32.8% MoM. NEV Penetration was also higher in February at 31.6% relative to January's 25.7%.

China's leading NEV player, BYD (BYDDF), updated that it expects to sell 3.6M vehicles in 2023 , up nearly 90% from last year's 1.9M units. Analysts expect Tesla (TSLA) to post about 420K deliveries for Q1CY2023, above Q4CY2022's 405K units.

Therefore, we assessed that the recent lithium price correction should help improve EV adoption, which is fundamental to Albemarle's long-term thesis of a 50% penetration rate by the end of the decade.

Notwithstanding, recent investors in ALB could have panicked over the lithium price volatility. Is it justified?

We discussed in our previous article that investors would need to assess the potential impact of a growth slowdown in its adjusted EBITDA trajectory.

The company telegraphed an adjusted EBITDA guidance of between $4.2B to $5.1B for FY23. Based on the midpoint of Albemarle's outlook, it implies an increase of about 33.6%.

Analysts' estimates are more optimistic, seeing an increase of 36.2%. However, with lithium prices projected to fall further by another 16% in China to RMB 200K per ton by the end of 2023, we believe the market is likely pricing in the potential for further estimate cuts.

Despite that, the worst of the price declines are likely over, suggesting that an opportunity to buy a mean-reversion opportunity in ALB could be in store.

ALB's blended fair value estimate implies a potential upside of about 30%, suggesting that ALB is attractively valued at the current levels.

We also gleaned constructive price action, indicating that an opportunity to buy weakness is reasonable.

Rating: Buy (Revised from Hold).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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