Guy Le Page

RM Corporate Finance

Mining boffin Guy Le Page has his head in clean energy at the moment, due to the fact everyone is seriously forecasting a crunch on all types of critical minerals.

His first pick is Sarytogan Graphite (ASX:SGA) , which listed on the ASX in July 2022, and managed by the luminaries at RM Corporate Finance and Inyati Capital. Full disclosure – both Inyati and RM Corporate Finance received fees and hold shares and options for the role as joint lead managers of the IPO last year.

Since that time SGA has hit a number of key milestones including a revised JORC Resource from 209Mt @28.5% TGC (containing 60Mt of graphite) to 228Mt @ 28.9Mt (66mt of contained graphite) with a 55% increase in indicated resources.

While there has never been any question about the resource size (one of the largest deposits of its type in the world) there were some questions being asked in the market about its ability to achieve battery-grade graphite specifications (99.95%) with some naysayers believing that while the deposit is one of the largest in the world, it was only good for pencils.

His second one, for those looking at success stories in this sector, Guy reckons should have a look at Renascor Resources (ASX:RNU).

RNU is developing a vertically integrated operation within South Australia consisting of the Siviour mine on the Eyre Peninsula, a concentrator and a downstream manufacturing facility to produce Purified Spherical Graphite (PSG) via chemical purification for sale to anode makers and use in Li-ion batteries for EVs.

The current market capitalisation is just under $400m, but not a bad model for SGA to follow.

Richard Ivers and Mike Younger

Prime Value Asset Management

We asked what what industries Richard and Mike are looking at lately and what drives their decisions.

“We’re stock pickers who find generally find opportunities across a range of sectors within the focus area (small cap industrials),” says Mike. “It tends to be stock-specific issues rather than macro factors that drive us to invest in a stock.”

Having said that, interrupts Richard, some of these sectors have been hit very hard recently and they may present an opportunity.

“One among many we’re watching closely is the Aussie retail sector.”

Richard says that to date, the Aussie retail sector ‘continues to positively surprise with sales trends.’

“While most retailers are reporting like-for-like sales declines of up to 10% over the last couple of months, this is coming off a heightened base stimulated by COVID savings and border lockdowns.”

Mike and Richard both have their eyes on Lovisa Holdings (ASX:LOV) .

“There are three names in particular which we’re keeping very close tabs on and Lovisa Holdings is one of them.”

“This is a business with a strategic approach which we believe is well considered and offers strong global growth potential.

Lovisa experienced comparable store sales growth of 6.3%, which the company told investors was a solid performance.

And Lovisa just dropped their FY23 numbers which we have here:

Revenue rose 30% to $596.5 million and gross profit increased by 31.8% to $476.7m, while earnings before interest and tax (EBIT) rose 27.9% to $105.7m and net profit after tax (NPAT) went up 16.7% to $68.2 million with an annual dividend per share of 69c, down 5c.

Management says the business is now running with a new, more stable capital structure And after all LOV’s literally splashed investors with cash the last few earnings drops, handing out the surplus on the company’s philosophy of providing dividends up to and according to what LOV only needs to work in terms of cash flow/balance sheet.

“And that’s part of what we like here – that LOV has a clever, simple but efficient business model. It does what it does with minimal fuss or bleed.”

Another stock that both Mike and Richard have their eyes on is ARB Corporation (ASX:ARB) , Australia’s largest manufacturer and distributor of 4×4 accessories.

“The company is a fascinating one really – a home-grown designer and manufacturer of 4WD motor vehicle accessories, all under the ARB brand,” the brokers say.

According to ARB, its export sales, which are mostly to the US, fell 8.7% for the year, with “export markets are impacted by challenging market dynamics”.

But analysts – and management – reckon there’s some potential long-term tailwinds with the company anticipating bioth sales and profits to grow in the 2024 financial year.

The last retailer the Prime Value Asset Management team are keeping a close track of is Baby Bunting (ASX:BBN) .

“What can I say, Baby Bunting is a category killer in a relatively more resilient part of the retail sector, with significant margin upside,” says Mike.

Yet, Richard notes, the brokers at both Ord Minnett and Morgans actually upgraded BBN, with an eye on a looming turnaround – noting that despite the profit slump, BBN’s total FY23 sales actually grew, up 1.7% on last year to $515.8m.

The company also launched its Baby Bunting Marketplace in June – just a few months back. This is an e-commerce store allowing third-party sellers to offer a curated range of products on the website (babybunting.com.au).

“It’s a smart play. It’s got legs, with BBN saying there’s already more than 5,000 SKUs available and their target is to finish FY24 with 20,000 SKUs from 150 retail partners.”

 

Goldman Sachs

Goldman Sachs has upgraded Core Lithium (ASX:CXO) from a Sell to a Neutral, with a 12-month price target of 44c (vs current price of 40c at the time of writing).

Since Goldman initiated on CXO with a Sell rating on 7 Dec 2022, the CXO share price has fallen by 69%.

Over the same period, spodumene/carbonate/hydroxide prices have also been down by -46%/-62%/-63% respectively.

Additionally, underground mining costs have risen around 35% since 2021, which is another headwind for the company’s BP33 recovery and improvement works.

CXO also noted recently that on current spot prices (spodumene of around US$3,350/t), in FY25 and FY26, it expects that realised spodumene pricing from offtake contracts would be ~10% below benchmark.

However, Goldman said a few important points are worth noting right now for the lithium producer.

Firstly, CXO now has its production risks more priced in at 1.1x NAV, which is comparable to its peers of between 1.1 to 1.2x NAV.

Secondly, around 30% of CXO’s market cap is in the form of cash, potentially partially mitigating exposure to falling lithium prices.

And thirdly, Goldman said that CXO’s offtake partners, Sichuan Yahua and Ganfeng (also CXO equity holders), continue to demonstrate confidence in the company and the Finniss project through providing support during the start-up of the project.

Following the recent cap raise, CXO is set to invest around $20-25m on de-bottlenecking and recovery improvement work at Finniss, $45-50m on early works at BP33, and $35-40m for exploration and study expenditure to better understand key growth projects.

“Though further exploration is underway, and while potential resource expansion could be promising, we see limited near-term upside, where new developments are unlikely to come online in time to benefit from the current pricing environment,” said Goldman.

Goldman added that key risks for Core Lithium include: exploration and resource updates at Finniss, cost inflation/operating risk, lithium prices and downstream/tolling volumes.

 

Ord Minnett

Broker

Ord Minnett meanwhile has a Buy recommendation on Big River Industries (ASX:BRI), and raised its target price from $2.77 to $2.79 (vs current market of $2.56 at the time of writing).

The broker said the price target lift was due to Big River’s recent outlook announcement, which was a positive surprise vs expectations.

In its trading update last week, Big River stated that its outlook “…remains positive given our end market diversity, supported by an expectation of the current housing backlog extending in CY24 and a strong commercial pipeline”.

Big River manufactures veneer, plywood and formply, as well as distributing building supplies.

Current housing approvals are experiencing a sharp reversal following the RBA’s most aggressive tightening cycle since 1989, but the medium-to-longer term outlook continues to strengthen, driven by a chronic under-build in housing, a surge in immigration and growth in the nascent Build-to-Rent (‘BTR’) sector.

“Whilst macroeconomic headwinds remain in the short-term, we believe this is already reflected in BRI’s current valuation discount relative to peers (~40% based on FY24e EV/EBITDA),” said Ord Minnett.

“Longer-term, we believe BRI retains significant organic and inorganic opportunities, a strong balance sheet position and a sustainable 6%+ fully franked dividend yield. Thus, we maintain our Buy rating.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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