05.28.18
Chemicals
Lithium Landscape; Battery Capacity is Charging
• Our updated analysis of the battery market reveals five key points. In this month’s edition of Lithium Landscape, we refresh our analysis of battery mega facilities to account for a number of new projects announced since our relaunch of Albemarle coverage one year ago. Our key takeaways are as follows: (1) we have seen 9 new lithium battery facilities come to market over the past year; (2) the announced battery capacity base to be installed by 2021 now represents ~11x the size of the installed base in 2016; (3) while Tesla may be the household name in the US, it is China that accounts for half of the incremental global battery capacity; (4) while battery capacity correlates positively with lithium demand, the growth rates are not fungible due to potential for battery project delays and low initial rates of battery capacity utilization, not to mention non-battery applications for lithium; and (5) CATL, a new entrant, has announced the largest battery facility to date and several other new entrants will complement incumbents Tesla, LG Chem, BYD, Samsung and Panasonic.
• Battery capacity will be key to charging the EV cycle. While much of the press around the lithium demand cycle focuses on electric vehicle adoption and penetration rates, the reality of the matter is adoption rates and sales forecasts for EVs hinge upon the production of batteries. With battery costs a meaningful driver of electric vehicle costs, companies have...
• Headline battery capacity to increase tenfold over 5 years. In Figure 2 we have diagrammed the announced battery facilities by player, with the x-axis aligned in chronological order based on announcement. If one were to take these headlines at face value, the result of all of these projects would be more than a tenfold increase in installed capacity, with the industry moving from 30GWh in 2016 to an estimated...
• New energy vehicle sales tick down sequentially; China shows strong y-y growth on easy comps. The typical seasonal slowdown played out again in the global auto markets with January EV sales declining month over month in the US and China. That said, our weighted-average growth function ticks up dramatically y-y as Chinese EV sales volumes comp against a very slow start to 2017. For context...
• Global lithium carbonate prices ticked up modestly, while lithium hydroxide was largely flat. We judge that global average contract lithium carbonate (LC) prices for January trended up 3.5% from December 2017 levels, bringing the price to $16,563/mt, up 39% from 1 January, 2017. Under the hood, we see that prices in Asia trended flat sequentially and remain roughly 3.5% off of the October highs. Local Chinese markets did come under pressure through the month, with consultants quoting prices down between…
• Lithium stocks recover modestly though still under-perform on the year. As depicted in Figure 6, lithium stocks have broadly recovered from trough levels realized in early February, though they largely remain underperformers on the year. If you recall from our last Lithium Landscape we discussed the supply side anxiety which had caused significant pressure on lithium equities to start the year. We suspect these concerns will remain front and center in investors mind, however the recent under-performance has brought new buyers to the table.
(Please see full report for details)
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Westlake Chemical Corporation (WLK: Hold, $119 PT)
Sticking to Knitting and Executing Well
• Westlake is checking lots of boxes entering 2018. Westlake’s 4Q earnings report featured several themes familiar to investors who have come to appreciate reliable execution from this talented management team: earnings upside (particularly in Vinyls), a more ambitious target for cost synergies, new organic capacity expansions, and substantial de-leveraging supported by healthy FCF. What is more, the company’s below-the-line items appear likely to improve a bit more than we had anticipated entering 2018. It’s hard to ask for much more in an off-season quarter that featured a FIFO accounting headwind, yet shares barely budged at +0.2% on the session vs.-0.6% for the S&P500 index. So, what gives? Investor expectations are arguably elevated, in our opinion. In any event, our read is that Westlake’s current valuation of 8.7x trailing EBITDA leaves little room for error with earnings set to crest above our estimate of normalized EPS in 2018. As a result, we remain content to bide time at this juncture having downgraded WLK shares to Hold at $109 on 2 January (click here).
• Our top 10 takeaways: (1) EPS of $1.67 was essentially in line, just $0.02 light vs. Street consensus of $1.69, yet ahead of our $1.48E; (2) earnings in Vinyls exceeded our forecast by a wide margin, while Olefins posted modest upside; (3) WLK increased its cost synergy target by $50mn to $250mn of which $170mn was in the books at year-end 2017; (4) the company plans to de-bottleneck chlor-alkali capacity at Gendorf, Germany and expand downstream Vinyls production capacity at three locations: Geismar, LA in the US and Burghausen and Gendorf at legacy Vinnolit operations in Germany; plans include the addition of 750mn lbs/yr of PVC resin, or ~11% of Westlake’s current PVC capacity and 0.8% of global...
• We raise our EPS estimates to reflect contributions above and below the line. For 2018 we increase our EPS estimate by $0.60 to $8.10 from $7.50, including $1.92E for 1Q18. Key changes reflect a higher earnings base in 4Q17 for both segments, but particularly in Vinyls, as well as lower projected interest expense and a lower 2018 tax rate of 23.0%, which is 110bps lower than our prior estimated rate of 24.1% under the new US tax regime. Looking ahead, we introduce $8.55E for 2019. We now model capex of $620mn for 2018, up 7-8% from $577mn in 2017. The budget includes estimated maintenance capex of $400mn plus preliminary spending on the aforementioned new projects and estimated expenditures of ~$80mn to fund Westlake’s portion of the Lotte ethylene cracker, scheduled for start-up in 2019 (40% complete as of year-end 2017).
• We rate WLK shares Hold and raise our price target. We increase our target by $4 to $119 in recognition of higher operating earnings and lower interest expense as well as incremental progress toward de-leveraging the balance sheet. As a reminder, our target of $119 is based on an average of two valuation frameworks; a relative EV/EBITDA multiple and a relative normalized P/E multiple, each of which is supplemented by an estimated value of $4 per share to reflect financial engineering optionality associated with Westlake’s MLP affiliate, WLKP. Our relative EV/EBITDA multiple methodology, which yields warranted value of $121, incorporates a multiple discount of -1.5x vs. the group. Our normalized P/E methodology, which yields warranted value of $109, utilizes a 15% discount to the group average multiple as applied to our updated normalized EPS estimate of $7.90.
(Please see full report for details)
Lithium Landscape; Battery Capacity is Charging
• Our updated analysis of the battery market reveals five key points. In this month’s edition of Lithium Landscape, we refresh our analysis of battery mega facilities to account for a number of new projects announced since our relaunch of Albemarle coverage one year ago. Our key takeaways are as follows: (1) we have seen 9 new lithium battery facilities come to market over the past year; (2) the announced battery capacity base to be installed by 2021 now represents ~11x the size of the installed base in 2016; (3) while Tesla may be the household name in the US, it is China that accounts for half of the incremental global battery capacity; (4) while battery capacity correlates positively with lithium demand, the growth rates are not fungible due to potential for battery project delays and low initial rates of battery capacity utilization, not to mention non-battery applications for lithium; and (5) CATL, a new entrant, has announced the largest battery facility to date and several other new entrants will complement incumbents Tesla, LG Chem, BYD, Samsung and Panasonic.
• Battery capacity will be key to charging the EV cycle. While much of the press around the lithium demand cycle focuses on electric vehicle adoption and penetration rates, the reality of the matter is adoption rates and sales forecasts for EVs hinge upon the production of batteries. With battery costs a meaningful driver of electric vehicle costs, companies have...
• Headline battery capacity to increase tenfold over 5 years. In Figure 2 we have diagrammed the announced battery facilities by player, with the x-axis aligned in chronological order based on announcement. If one were to take these headlines at face value, the result of all of these projects would be more than a tenfold increase in installed capacity, with the industry moving from 30GWh in 2016 to an estimated...
• New energy vehicle sales tick down sequentially; China shows strong y-y growth on easy comps. The typical seasonal slowdown played out again in the global auto markets with January EV sales declining month over month in the US and China. That said, our weighted-average growth function ticks up dramatically y-y as Chinese EV sales volumes comp against a very slow start to 2017. For context...
• Global lithium carbonate prices ticked up modestly, while lithium hydroxide was largely flat. We judge that global average contract lithium carbonate (LC) prices for January trended up 3.5% from December 2017 levels, bringing the price to $16,563/mt, up 39% from 1 January, 2017. Under the hood, we see that prices in Asia trended flat sequentially and remain roughly 3.5% off of the October highs. Local Chinese markets did come under pressure through the month, with consultants quoting prices down between…
• Lithium stocks recover modestly though still under-perform on the year. As depicted in Figure 6, lithium stocks have broadly recovered from trough levels realized in early February, though they largely remain underperformers on the year. If you recall from our last Lithium Landscape we discussed the supply side anxiety which had caused significant pressure on lithium equities to start the year. We suspect these concerns will remain front and center in investors mind, however the recent under-performance has brought new buyers to the table.
(Please see full report for details)
----
Westlake Chemical Corporation (WLK: Hold, $119 PT)
Sticking to Knitting and Executing Well
• Westlake is checking lots of boxes entering 2018. Westlake’s 4Q earnings report featured several themes familiar to investors who have come to appreciate reliable execution from this talented management team: earnings upside (particularly in Vinyls), a more ambitious target for cost synergies, new organic capacity expansions, and substantial de-leveraging supported by healthy FCF. What is more, the company’s below-the-line items appear likely to improve a bit more than we had anticipated entering 2018. It’s hard to ask for much more in an off-season quarter that featured a FIFO accounting headwind, yet shares barely budged at +0.2% on the session vs.-0.6% for the S&P500 index. So, what gives? Investor expectations are arguably elevated, in our opinion. In any event, our read is that Westlake’s current valuation of 8.7x trailing EBITDA leaves little room for error with earnings set to crest above our estimate of normalized EPS in 2018. As a result, we remain content to bide time at this juncture having downgraded WLK shares to Hold at $109 on 2 January (click here).
• Our top 10 takeaways: (1) EPS of $1.67 was essentially in line, just $0.02 light vs. Street consensus of $1.69, yet ahead of our $1.48E; (2) earnings in Vinyls exceeded our forecast by a wide margin, while Olefins posted modest upside; (3) WLK increased its cost synergy target by $50mn to $250mn of which $170mn was in the books at year-end 2017; (4) the company plans to de-bottleneck chlor-alkali capacity at Gendorf, Germany and expand downstream Vinyls production capacity at three locations: Geismar, LA in the US and Burghausen and Gendorf at legacy Vinnolit operations in Germany; plans include the addition of 750mn lbs/yr of PVC resin, or ~11% of Westlake’s current PVC capacity and 0.8% of global...
• We raise our EPS estimates to reflect contributions above and below the line. For 2018 we increase our EPS estimate by $0.60 to $8.10 from $7.50, including $1.92E for 1Q18. Key changes reflect a higher earnings base in 4Q17 for both segments, but particularly in Vinyls, as well as lower projected interest expense and a lower 2018 tax rate of 23.0%, which is 110bps lower than our prior estimated rate of 24.1% under the new US tax regime. Looking ahead, we introduce $8.55E for 2019. We now model capex of $620mn for 2018, up 7-8% from $577mn in 2017. The budget includes estimated maintenance capex of $400mn plus preliminary spending on the aforementioned new projects and estimated expenditures of ~$80mn to fund Westlake’s portion of the Lotte ethylene cracker, scheduled for start-up in 2019 (40% complete as of year-end 2017).
• We rate WLK shares Hold and raise our price target. We increase our target by $4 to $119 in recognition of higher operating earnings and lower interest expense as well as incremental progress toward de-leveraging the balance sheet. As a reminder, our target of $119 is based on an average of two valuation frameworks; a relative EV/EBITDA multiple and a relative normalized P/E multiple, each of which is supplemented by an estimated value of $4 per share to reflect financial engineering optionality associated with Westlake’s MLP affiliate, WLKP. Our relative EV/EBITDA multiple methodology, which yields warranted value of $121, incorporates a multiple discount of -1.5x vs. the group. Our normalized P/E methodology, which yields warranted value of $109, utilizes a 15% discount to the group average multiple as applied to our updated normalized EPS estimate of $7.90.
(Please see full report for details)
