BUY HOLD SELL – Lynas (ASX: LYC)
Lynas Corp (ASX: LYC) – It’s one of the top performers in the ALL ORDS over the last six months. An attractive growth trajectory. Henry’s been onto this one for a while. About time we put it through the BHS filter. LYC is the world’s second largest producer of separated Rare Earths, and the only significant producer outside of China. The company has turned itself around since the ‘debt-laden’ mess it was labelled in 2014. What’s the deal with rare earths? Funnily enough, they aren’t actually that rare. Apart from being used in electric vehicles, green technologies, consumer electronics, robotics and medical device, rare earths are also a key component in many pieces of specialised military equipment. For example, each F-35 Lightning II aircraft – one of the world's most sophisticated, manoeuvrable and stealthy fighter jets - needs ~417 kilograms of rare-earth materials, according to a 2013 report from the US Congressional Research Service. The issue is, China accounts for almost 95% of global output and the US relies on the Asian nation for ~80% of its rare-earths requirement according to a research piece last year in the SMH. You might see where this is going. The table above highlights the supply risk for rare earths as calculated by the European commission. Not surprisingly they are in the ‘Very High’ category. Late in the September quarter, Trump announced an Executive Order to build reliable and resilient critical minerals supply chains for the US economy. The European Union also identified the need for a diversified and sustainable supply chain. With China becoming increasingly volatile on the trade front, global heavyweights are not surprisingly looking to other solutions/providers. The focus for the business recently has been expanding its product suite and its Heavy Rare Earths (HRE) separation capability. In July it signed a deal with the US department of defense for work on the proposed US-based HRE facility. At the end of November, exploration results from Mt Weld showed promising outcomes. Quarterly production revealed a ‘good’ start to the new financial year. Total Rare Earth Oxide production was 4,110 tonnes, compared to 2,579 tonnes in the previous quarter. Sales revenue was $87m during the September quarter, up from $38m in the previous quarter. LYC also completed a $425m capital raising which will help fund projects like its Kalgoorlie processing facility, which is expected to be operational by mid-2023. The operation will assist in de-coupling reliance on its Malaysian operations which are exposed to a level of sovereign risk.[activecampaign form=64]
- One the top-10 performers in the ALL ORDS over the last three months, and the last six months.
- ROE of 8.6% not terribly exciting, behind the average return of the ALL ORDS. Forecast to improve substantially in FY2 and FY3.
- EPS in the last financial year no doubt hurt by the capital raising. Financial performance in FY0 was less than pleasing, weighed down by progress on its growth phase. But that’s in the past now.
- EPS is expected to massively outpace revenue in the next couple of years. A solid indication the business is focused on driving efficiencies.
- A PE of 69.5x is relatively expensive. Expected to move to far more palatable levels in future periods. 21.9x and 14.3x in FY2 and FY3 respectively. ALK sits on 26.5x.
- Of the five brokers that follow the company, 80% have a BUY or STRONG BUY rating.