I. Sector Landscape
Renewable energy sources accounted for around 7% of Australian energy consumption in FY20. Renewable energy generation has over doubled in the past decade; however, consumption of biomass such as bagasse and firewood remains around 40% of total renewable energy consumption in Australia. In 2020, 24% of Australia’s electricity generation was extracted from renewable energy sources, including wind (9%), solar (9%), and hydroelectricity (6%).
Renewable Energy Target Scheme
RET Scheme Summary: The renewable energy target (RET) scheme is devised to curtail the emissions of greenhouse gases in the electricity sector by promoting electricity generation via renewable energy resources. The scheme assists the transformation of the Australian energy market mix to cleaner and more diverse sources.
Recent News from ARENA in Support of Renewable Energy
Key Updates on Battery and Nuclear Materials
Electric Vehicle (EV) Demand: Global Light Electric Vehicle (EV) sales advanced in CY21, surging steadily across each quarter, considering an estimated 2 million EVs sold in December 2021. The entire EV sales for the year surged from 3.2 million in CY20 to a projected 6.5 million vehicles in CY21.
Lithium Demand Riding on EVs Gaining Market Share: Spot prices for lithium hydroxide averaged US$57k/tonne in February 2022, with daily prices clocking US$70k/tonne by mid-March. Global demand for lithium is estimated to expand from 526k tonnes of lithium carbonate equivalent (LCE) in CY21 to 636k tonnes in CY22. During the outlook period, annual growth in lithium demand is estimated at around 20%.
Nuclear Power Driving Uranium Demand: Nuclear power development is being taken up by a broader range of countries, with several building nuclear power for the first time. Uranium price gains are expected to be driven by supply shortfalls as mines gradually deplete. The prices are estimated to lift from US$36.50/pound in CY21 to US$47/pound by CY27.
Index Performance
ASX 200 Energy (GIC) has generated a 1-year return of ~+24.02%, compared to ~+7.12% by the ASX 200 Index. Increasing exports, favourable pricing across most minerals, and recovering business sentiments drove the sector gains.
The ASX 200 Energy (GIC) Index outperformed ASX 200 Index in the past year by ~16.90%.
Source: REFINITIV as of 14th April 2022
Key Risks and Challenges
At the utility-scale end of the clean energy sector, securing timely access to the grid remains an ongoing challenge. Delays in achieving energisation and commissioning new projects at their connection point into the power system. Uranium’s supply shortfall is expected due to the gradual depletion of mines, affecting production levels. The chronic shortage of semiconductor chips across the globe has devastated production in the automobile sector. The current geopolitical tensions between Ukraine and Russia have significantly affected the international trade policies and global supply chain.
Outlook
Favourable Estimated from CER: The Clean Energy Regulator (CER) expects between 2.5 and 3 GW to register for Large-scale Generation Certificate (LGC) generation by wind and solar projects. The LGC generation in CY21 stood at 2.3 GW, down from CY20, due to the timing of registrations.
Global Uptick in EV Demand: EV market share has tripled in the past two years, with EV sales now representing almost 9% of the worldwide car market.
Extensive Investments in Green Energy: The Clean Energy Finance Corporation (CEFC) has made investment commitments of over $8.8 billion via more than 170 direct clean energy transactions from inception to 31st December 2020.
Lithium Production Estimates: The Australian lithium production is estimated to clock a three-fold figure across the outlook period, surging from 224k tonnes of LCE in FY21 to 692k tonnes of LCE in FY27.
Export Earnings Forecast for Uranium: Export earnings estimates for FY22 and FY23 have been revised by $50 million, falling in line with solid pricing prospects.
II. Investment theme and stocks under discussion (PLS, PDN, ERA)
After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Book Value’ multiple and TTM method.
- ASX: PLS (Pilbara Minerals Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$8.81 billion)
PLS is a metal producer with its Pilgangoora Lithium-Tantalite Project located in the Pilbara region of Western Australia
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 16.75% on 14th April 2022. Moreover, the stock might trade at a slight premium compared to its peers' average Price to Book Value multiple (NTM trading multiple), given decent prospects for the lithium market and increased production. For valuation, peers such as Western Areas Ltd (ASX: WSA), IGO Ltd (ASX: IGO), Allkem Ltd (ASX: AKE), and others are considered. Considering positive bottom-line, increased operating efficiency, favourable production, decent financial position, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $2.960 as of 14th April 2022.
PLS Daily Technical Chart (Source: REFINITIV)
2. ASX: PDN (Paladin Energy Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$2.69 billion)
PDN operates as a uranium exploration company with mining assets in Australia and Canada.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 18.20% on 14th April 2022. Moreover, the stock might trade at a slight premium compared to its peers' average Price to Book Value multiple (NTM trading multiple), given the considerable price uptick in uranium and global demand for nuclear energy. For valuation, peers such as Pilbara Minerals Ltd (ASX: PLS), Panoramic Resources Ltd (ASX: PAN), Liontown Resources Ltd (ASX: LTR), and others are considered. Considering the decent financial position to leverage exploration activities, improved exploration prospects, rising uranium prices, current trading levels, and upside indicated by valuation, we give a “Speculative Buy” recommendation on the stock at the closing market price of $0.965, up by ~6.043% on 14th April 2022.
PDN Daily Technical Chart (Source: REFINITIV)
3. ASX: ERA (Energy Resources of Australia Limited)
(Recommendation: Hold, Mcap: A$1.34 billion)
ERA is engaged in the business of mining, processing, as well as selling uranium oxide.
Valuation
The stock of ERA gave a positive return of ~58.69% in the past year. The stock is currently trading slightly lower than the 52-weeks average price level band of $0.195 - $0.580. On a TTM basis, ERA has an EV/Sales multiple of 5.8x compared to the industry median (Energy) of 24.4x. Given the rehabilitation of the Ranger Project Area, current trading levels, and key risks associated with the business, we give a “Hold” recommendation on the stock at the closing market price of $0.365, as of 14th April 2022.
ERA Daily Technical Chart (Source: REFINITIV)
Comparative Price Chart:
Note: All the recommendations and the calculations are based on the closing price of 14th April 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.
Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.
Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.
There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.
You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.
The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.
Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.
Please also read our Terms & Conditions and Financial Services Guide for further information.
On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.
Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.