Company Overview: Lynas Rare Earths Limited (ASX: LYC) is a producer of high-quality Rare Earths products, including Neodymium and Praseodymium (NdPr), Lanthanum (La), Cerium (Ce), and Mixed Heavy Rare Earths (SEG). The company is focused on contributing to the development of a sustainable Rare Earths supply chain outside China. The company claims that its Rare Earths deposit in Mt Weld, Western Australia, is one of the highest-grade Rare Earths mines. LYC also operates one of the largest single Rare Earths processing plant in Malaysia.

LYC Details

Long-term Outlook Supported by Favourable Market Settings and Growth Initiatives: During the last financial year, i.e., FY20, the company’s financial performance was impacted by COVID-19 related temporary shutdown as well as lower market prices and the temporary production halt in December 2019. In the latest quarter ending March 2021, the company posted an uptick in production and improved operational performance, underpinned by its resilient business and strong focus on cost management, and favourable market setting.

• Progressing Lynas 2025 Growth Initiatives: As part of its ‘Lynas 2025’ growth plan, the company is building a larger business to meet forecast demand growth. The development of Kalgoorlie Rare Earth Processing Facility and associated upgrades at the Lynas Malaysia plant are part of Lynas 2025 foundation projects.
• Favourable Market Settings: Global megatrends have the potential to create positive outcomes for LYC. Some of the global megatrends that are working in favour of LYC include rising demand of Electric vehicles, expansion of the consumer electronics market and Global Smart Homes market, and increased global significance of Rare Earths.

Key Takeaways from H1FY21 Results:

• Rise in Sales Revenue: Sales revenue grew by 12% YoY to $202.5 million, due to favourable market settings and improved prices of Rare Earths materials.
• Completed $425 Million Equity Raising: During the period, LYC completed an equity raising of $425 million to fund its Lynas 2025 foundation projects.
• Rise in NPAT: NPAT grew by 944% YoY to $40.6 million in H1FY21.

Revenue and NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics:

The gross margin for H1FY21 stood at 25.5% in H1FY21, up from 15.8% in H1FY20. The net margin for H1FY21 stood at 20.1%, up from 2.2% in H1FY20. The current ratio for H1FY21 stood at 8.24x in H1FY21, up from 2.12x in H1FY20, driven by the proceeds received from equity raising.

Liquidity Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 34.86% of the total shareholding, while the top four constitute the maximum holding. Ausbil Investment Management Limited and The Vanguard Group, Inc. are holding a maximum stake in the company at 7.40% and 5.00%, respectively, as also highlighted in the chart below:   

                           

(Source: Analysis by Kalkine Group)

Q3FY21 Result Highlights:

LYC’s Q3FY21 results were underpinned by robust Demand for NdPr and higher prices for both NdPr and SEG.

• Rise in Sales Receipts: Sales receipts for Q3FY21 stood at $133 million, up from $68 million in Q2FY21, due to the delay in cash collection from revenue generated in the December quarter.
• Increase in REO Production: Total REO production for Q3FY21 stood at 4,463 tonnes, up from 3,410 tonnes in Q2FY21.
• Rise in Selling Prices: During the quarter, the selling prices of NdPr and SEG reached new records and the average selling price across the company’s full product range was $35.5/kg.
• Construction of Light Rare Earths separation plant in US: In January 2021, the company signed an agreement with the United States Government to jointly fund the construction and development of a commercial Light Rare Earths separation plant in the United States.
• Rise in Cash Balance: As at 31 March 2021, the company had a cash balance of $568.5 million, up from $512.6 million as at 30 December 2020.

Key Risks:

• COVID-19 Uncertainties: The company is exposed to the risks associated with the short- and long-term impact of the COVID-19 pandemic, including international trade impacts, potential taxation changes, work stoppages, lockdowns, quarantines, travel restrictions and the impact on the global economy and share markets.
• Fluctuations in Rare Earth Prices: The market fluctuations in Rare Earth prices could impact the company’s financial performance. Geopolitical factors, demand-side factors, and supply-side factors could impact the Rare Earth prices.

Outlook:

As a result of the improved financial performance in H1FY21, LYC is planning to repay subsidies received from the Australian and Malaysian governments in 1HFY21.  Looking ahead, the company is focused on expanding its industrial footprint with a planned Rare Earths Processing Facility in Kalgoorlie, Western Australia. It has received the necessary approval and has commenced the preliminary site works for its Kalgoorlie project. The proceeds from the recent $425 million equity raising will be used for the planned Kalgoorlie Rare Earth Processing Facility and associated upgrades at the Lynas Malaysia plant. The company will continue to support the development of robust supply chains outside China. The company is planning to release Q4FY21 results on 26 July 2021.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

Over the last three months, the stock has delivered positive returns of ~6.13%. The stock is currently trading above the 52-weeks above price level brand of $2.002 and $6.820. We have valued the stock using P/E multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at some premium to its peers’ average P/E (NTM trading multiple), considering improved financial performance in H1FY21, favourable market settings, and a modest outlook. We have taken peers like Pilbara Minerals Ltd. (ASX: PLS), Imdex Ltd (ASX: IMD), Western Areas Ltd (ASX: WSA). Considering the company’s decent performance in H1FY21 and Q3FY21, rising cash balance, favourable mega trends, and valuation, we give a “Buy” rating on the stock at the current market price of $5.790 as on 21 July 2021, 2:53PM (GMT +10), Sydney, Eastern Australia.

LYC Daily Technical Chart, Data Source: REFINITIV

Note, the blue colour line reflects the 21-period moving average and the green colour line in the chart’s lower segment reflects the Relative Strength Index (14-Period). 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined: 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

---

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 do not hold interests in any of the securities or other financial products covered on the Kalkine website.