I. Sector Landscape and Outlook

From rooftop solar to utility-scale applications, Australia thrived in the adoption of renewable energy. Favourable government policies, commitment to the 2030 Paris target, increasing industrialization, and technological investments has led to a spike in renewable energy consumption. The nation showed commitment to solar PV installation. According to International Energy Agency, Australia ranked no. 1 in the world for the highest per capita installation of solar PV, reaching 644 watts per person. In 2020, more than 27% of the nation’s electricity generation came from clean energy sources, dominated by wind and rooftop solar. According to International Renewable Energy Agency (IRENA), Australia boasts the highest share of renewable energy capacity with 43.5%, compared against the worldwide share of 36.6% in 2020. The nation had a renewable energy capacity of 35.69 GW as compared to the world capacity of 2,799 GW.  

Figure 1: Australia Topped with the Highest Share of Renewables Capacity:

Data Source: International Renewable Energy Agency, Chart Created by Kalkine Group

Following the Federal Government’s Technology Investment Roadmap, investments in hydrogen-based renewable projects gained traction. The government of South Australia plans to build three renewable hydrogen export hubs featuring electrolysers of up to 2.6 GW. The Tasmania government unleashed ambitious plans to become the largest exporter of hydrogen by 2030. Australia beats the Kyoto-era emission targets in June 2020, and emission per person declined to the lowest level in 13 years. The nation is approaching towards the Paris agreement with a target to cut emission by 50% on the 2005 levels by 2030.

Renewables proved resilient during the pandemic, with electricity generation using renewable energy sources rose 21.0% in 2019-20 to reach 62.2 TWh. The nation saw more than 3 GW of new capacity from small-scale solar PV installation. It helped to past the hydro generation that dominated the second place hitherto. About 32 projects were completed during the year for large-scale solar PV installation that brought 2 GW of new capacity in 2020. At least 76 large-scale wind and solar projects were under construction at the end of 2020. It may potentially unlock 8 GW of new capacities in the near term. Victoria topped the highest renewable generation with 13,685 GWh in 2020. Tasmania achieved ~99% of electricity generation through renewables, reaching the highest penetration levels compared to other states. South Australia boasts the second-highest penetration, with 60.1% of renewables in 2020.

Figure 2: Renewable Generation Showing Upward Movement:

Data Source: Department of Industry, Science, Energy and Resources, Chart Created by Kalkine Group

The rooftop installation has gained momentum, setting a fresh record. About 3 GW of new capacity added to Australian rooftops in 2020 that helped to push solar installation capacity reaching 17.63 GW, representing 48% of total renewable capacity. Wind energy contributed the lion’s share of electricity generation in Australia, with 1,097 MW capacity added throughout the year.

Figure 3: Rooftop Installation Drives the Solar Energy Market:

Data Source: International Renewable Energy Agency, Chart Created by Kalkine Group

The nation has launched a $2 billion Climate Solutions Fund to support new energy efficiencies in homes, businesses, and community organisations. The funds were also used to support the ongoing pumped project, the Snowy Hydro project. It is the largest hydro-storage project in Australia which is expected to deliver 2,000 MW of additional dispatchable generation capacity and 350,000 MWh of storage. The project involves connecting two existing reservoirs in the Snowy Mountains. The government provided $2.5 billion in support to study Tasmania hydro project.

Figure 4: Updates on Renewable Policies of Selected States:

Data Source: Clean Energy Council, Chart Created by Kalkine Group

There are about 16 utility-scale battery projects under construction, which are expected to bring 595 MW of capacity going forward. Victoria is on the plan to build a 300 MW battery project. New South Wales to install a massive 1.2 GW in Hunter Valley. Notable projects in utility-scale battery storage project include 150 MW Hornsdale Power Reserve. Australia saw a surge in battery storage with residential installation gained prominence. Households installed 23,796 small-scale batteries with a combined capacity of ~238 MW in 2020. South Australia saw the largest battery installations in 2020, aided by the government’s Home Battery Scheme and commitment of $18 million. The launch of Empowering Homes battery loan program in New South Wales saw a surge in installation to 6,264 units.

Figure 5: Uproar in Battery Installation by Households in 2020:

Data Source: Clean Energy Council, Chart Created by Kalkine Group

Australia is a home for critical minerals such as lithium, graphite, cobalt, and rare earths. The ongoing revolution in electric vehicles and battery storage technology has pushed the consumption of lithium. Demand is expected to rise 965% by 2050 from 2017 production levels, according to Geosciences Australia. Australia topped the chart with no. 1 ranking in the production of lithium which contributed 56% to the world output. The nation had 3,091 kt of reserves and 4,033 kt of measured and indicated resources in 2019, accounting for 29% of the world’s resources. Western Australia holds the nation’s lithium deposits. Australia made $1.1 billion in exports of lithium in 2019-20. The softening of prices in 2019 delayed mine expansion. As electric vehicles sales are expected to increase from 3 million to 26 million by 2030, Australia is likely to see a recovery in lithium production from the downturn. Lower prices of electric vehicles and government policy support is expected to spur world demand for lithium from 305,000 tonnes in 2020 to 426,000 tonnes of lithium carbonate equivalent in 2021, according to the Department of Industry, Science, Energy and Resources.

Index Performance:

The ASX 200 Energy (GIC) generated 6-months returns of ~+17.13% as compared to ~+13.42% by the ASX 200 Index. Strong commitment in net zero emission as per 2030 Paris Target, wider adoption of solar rooftop installations, evolution in electric vehicles, and battery storage technology helped the sector to post positive gains.

Figure 6: The ASX 200 Energy (GIC) outperformed the ASX 200 Index by 3.71% over the last six months.

Source: Refinitiv (Thomson Reuters) as on the close of 22 April 2021

Key Risks and Challenges:

Congestion and inconsistencies in grid connection in Australia may halt the commissioning of large-scale energy projects. Low system strength in some areas affects the nationwide renewables rollout. The oversupplied market for wind and solar may hurt capacity addition. According to International Energy Agency, delays in grid connection approvals and oversupply of generation certificates may shrink utility-scale solar PV projects and capacity addition in 2021 and 2022. Wholesale electricity prices reached a five-year low in 2020 due to the pandemic. This trend is likely to continue over the next several years. Lower wholesale electricity prices may put pressure on PPA pricing of renewables and may affect yields on the sale of electricity in the wholesale market.

Figure 7. Key Risks in Clean Energy Sector:

Sources: Analysis by Kalkine Group

Outlook:

The Morrison government laid out Technology Investment Road Map to lower emission and energy costs. As per the roadmap, the government aims to bring hydrogen production under $2 per kilogram, to reduce the cost of carbon materials with low emission steel production under $900 per tonne and aluminium under $2,700 per tonne, among several other things. Under the plan, the government will invest $1.9 billion in new energy technologies. The road map aims to generate 130,000 jobs by 2030 and eliminate 250 million tonnes of emission in Australia by 2040. The government is expected to invest $18 billion in low emission technologies over the decade to 2030. Heightened demand for electric vehicles and battery storage may lift lithium production. Higher prices of spodumene and local refining may increase lithium exports in Australia to $5.4 billion by 2025-26, according to the Department of Industry, Science, Energy and Resources. Several key players have progressed plant expansion and significant traction in capital raising plans.

II. Investment theme and stocks under discussion (MEZ, NVX, WES, PLS)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Sales’ method.

1. ASX: MEZ (Meridian Energy Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$13.09 Billion)

MEZ is engaged in hydro-electric power generation, supplying it to residential, business, and rural customers In New Zealand.

Valuation

2. ASX: NVX (Novonix Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$883.70 Million)

NVX is engaged in the manufacturing of lithium-ion batteries, battery materials and equipment covering worldwide customers.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 28.40% on 22 April 2021. We believe that the stock might trade at a discount as compared to its peer median Price/Sales (NTM Trading multiple) as the company is yet to enter the commercialization stage. It had incurred significant losses in the past but was adequately capitalized, therefore, associated risks needs to be considered. For the said purposes, we have taken peers such as Codan Ltd. (ASX: CDA), Catapult Group International Ltd. (ASX: CAT), Seeing Machines Ltd. (ASX: M2Z).

3. ASX: WES (Wesfarmers Limited)

 (Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$63.35 Billion)

WES operates in home improvement, outdoor living and building materials, general merchandise and apparel, office and technology products, manufacturing and distribution of chemicals and fertilisers, industrial and safety product distribution, lithium production, and gas processing and distribution.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 17.34% on 22 April 2021. We believe that the stock might trade at a premium as compared to its peer median Price/Sales (NTM Trading multiple) considering the recent update that Wesfarmers through its joint venture subsidiary, Covalent Lithium, committed initial funding of the Mt Holland lithium project. The feasibility study cites that the project leads to production capacity of 50,000 tonnes of battery-grade lithium hydroxide per annum. For the said purposes, we have taken peers such as Harvey Norman Holdings Ltd. (ASX: HVN), Nick Scali Ltd (ASX: NCK), GUD Holdings Ltd. (ASX: GUD). The stock delivered annualized yield of 3.25%.

4. ASX: PLS (Pilbara Minerals Limited)

(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$3.62 Billion)

PLS is engaged in the operation of hard-rock lithium and produces spodumene and tantalite concentrate.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 18.81% on 22 April 2021. We believe that the stock might trade at a discount as compared to its peer median Price/Sales (NTM Trading multiple) considering the sequential losses and declining prices of spodumene which may put pressure on margins. For the said purposes, we have taken peers such as Galaxy Resources Ltd. (ASX: GXY), Orocobre Ltd. (ASX: ORE), Macmahon Holdings Ltd. (ASX: MAH).

Note: All the recommendations and the calculations are based on the closing price of 22 April 2021. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters). 

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.

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.