NYSE: ALB. October 21, 2017

Transcription

1 NYSE: ALB October 21, 2017

2 Executive Summary Recommendation Company Information Investment Thesis Buy Current Price: $ Week Range: $76.32 $ Price Target: $155 Albemarle engages in developing, manufacturing and marketing of specialty chemicals Three business segments: I. Lithium & Advanced Materials II. Bromine Specialties III. Refining Solutions Electric vehicle (EV) adoption will drive market demand for lithium Limited near-term supply will create a supply deficit Market has improperly forecasted the price of lithium to account for this supply deficit University of Wisconsin 2

3 Table of Contents I. Company Overview II. Lithium Industry Overview III. Investment Thesis IV. Forecast & Valuation V. Risks Assessment VI. Conclusion VII. Appendix University of Wisconsin 3

4 I. Company Overview

5 Company Overview Albemarle is a global chemical player operating three unique segments Business Description Ticker Symbol: ALB (NYSE) Market Capitalization: $15.4bn Headquarters: Charlotte, NC Industry: Chemicals Description: Albemarle engages in developing, manufacturing and marketing of chemicals. It operates through three segments: Lithium and Advanced Materials, Bromine Specialties, and Refining Solutions. The company was founded in Financials Revenue ($ Billions) $2,745 $2,616 $2,446 $3,651 (4)% (5)% (7)% 49% (27)% $2,677 $2,919 9% Stock Price 258% 70% Business Segments (% Revenue) Lithium 36.2% Refining Solutions 27.4% Bromine 29.6% Other 6.8% E Revenue Source: FactSet % YOY Growth Albemarle S&P 500 University of Wisconsin 5

6 % Total Revenue Business Segments Overview Albemarle reformed in 2016 to create three business segments 36.2% 29.6% 27.4% 6.8% Lithium & Advanced Materials Bromine Specialties Refining Solutions Other Description: End Markets: Lithium Mining and Performance Catalyst Solutions Lithium batteries, greases, thermoplastics, pharma, etc. Description: End Markets: Bromine Mining Electronics, circuit boards, textiles, wire and cable, chemical synthesis, etc. Description: End Markets: Clean Fuel Technologies and Heavy Oil Upgrading Cleaner refining process, high yield cracking Description: Operating segments acquired from Rockwood divested in % YOY Rev. Growth 43% EBITDA Margin 2% YOY Rev. Growth 29% EBITDA Margin 0% YOY Rev. Growth 33% EBITDA Margin Source: FactSet University of Wisconsin 6

7 Company History Albemarle has made a strategic shift towards Lithium which has been well received by the market Annotated Stock Chart $130 $110 $90 $ $50 $30 Jan-14 Jun-14 Dec-14 May-15 Nov-15 Apr-16 Oct-16 Apr-17 Sep-17 Apr. 24, 2004 Acquired Akzo Nobel s refinery catalyst business to enter catalyst industry Jan. 12, 2015 Feb. 18, 2016 Jun. 17, 2016 Jan. 23, 2017 Acquires Rockwood for $6.2 billion to become world s largest supplier of lithium Signed contact with Chilean government that increases and extends mining rights Announces divestiture of Chemetall Surface Treatment segment Purchase of lithium conversion assets from Jiangxi Jiangli New Materials Mar. 16, 2017 Began expansion of its lithium production capacity in Australia Source: FactSet, Yahoo Finance University of Wisconsin 7

8 Company Evolution Strategic shift towards lithium has changed Albemarle s composition and outlook Strategic Initiatives Evolution into a Key Lithium Player Albemarle shifted its focus from performance catalysts to lithium and refining solutions over the last 5 years Utilizing the consistent cash flow from legacy businesses to fund capital expenditure, R&D and M&A in the Lithium segment Notable Acquisitions Rockwood Holdings (2015): Acquisition gave Albemarle a market leading position in the production of lithium Jiangli New Materials (2017): Acquisition adds 15,000 metric tons to Albemarle s lithium capacity Services Percent Lithium Revenue Lithium Industry Rank Cumulative Acquisitions Executed 5 Year EBITDA Growth Refining Catalysts, Bromine, Custom Manufacturing Bromine, Refining Solutions, Performance Catalysts, Lithium Lithium, Refining Solutions, Bromine 0% ~25% ~49% None #1 # % 3.8% 21.6% Source: FactSet, 2012 Morgan Stanley Conference University of Wisconsin 8

9 Lithium Overview Lithium has become the key growth driver due to recent surge in battery demand Overview Customers Key Figures Extracts and converts lithium compounds for various downstream applications Provides services for the handling and recycling of lithium materials (batteries, automobile batteries) (renewable energy storage division) $669mm 2016 Revenue 16% YOY Rev. Growth (recycle precious metals) (manufacture glass, ceramics) Applications $286mm Adj. EBITDA Electronics batteries Automobile batteries Plastic Bottles Greases + Various life sciences applications 43% EBITDA Margin Source: Company Filings University of Wisconsin 9

10 Lithium Overview (Cont d) Albemarle mines its lithium in Chile, Nevada and Australia Lithium Capacity and Demand Estimates Salar de Atacama, Chile Lithium Capacity: 75 metric tons Conversion Capacity: 30 metric tons in metric tons by 2020 Silver Peak, Nevada Lithium Capacity: Conversion Capacity: 6 metric tons 5 metric tons per year through 2020 Albemarle seeks to improve lithium conversion capabilities while researching mining alternatives to traditional brines Greenbushes, Australia Ownership: 100% Lithium Capacity: Conversion Capacity: Source: FactSet, Company Filings Ownership: 50% 131 metric tons 20 metric tons in metric tons by 2020 Ownership: 100% Management Demand Estimates 235MT 2017 Estimate 12% CAGR $9,665 per MT ALB realized price in MT 2021 Estimate University of Wisconsin 10

11 II. Lithium Industry Overview

12 Lithium Industry Overview Dramatic upward moment fueled by demand for batteries Lithium Pricing Lithium Reserves $14,000 Nominal Price per MT ALB Price Estimate Rockwood Estimate Lithium is mined either from mineral spodumene or from lithium enriched brines $12,000 $10,000 44% 66% Brine deposit Mining deposit $8,000 $6,000 $4,000 $2,000 $ Source: Company Filings, FactSet, Bloomberg Commentary It takes 5-10 years to bring new lithium capacity to the market Costs associated with extraction through salt brines are lower than the mining of spodumene $2,000 - $3,800 Brine Extraction Cost per MT $4,000 - $6,000 Mine Extraction Cost per MT University of Wisconsin 12

13 Lithium Industry Overview (Cont d) Lithium is heavily concentrated in South America and China World Lithium Reserves and Resources Global reserves and resources : 55 million tons Lithium Key Players (As of 2015) Company % of Global Lithium Supply SQM 36% FMC Corporation 21% Others 9% Albemarle 34% Trace amounts <1 million tons 1-3 million tons 3-7 million tons >7 million tons Source: Company Filings, Dajin Resources, US Geological Survey University of Wisconsin 13

14 III. Investment Thesis

15 Investment Thesis Strong business profile coupled with underappreciated lithium potential makes Albemarle an attractive investment opportunity Compelling Investment Highlights Reason for Market Mispricing Pricing power in lithium and bromine 1 Electric vehicle (EV) adoption will be primary driver of nearterm lithium demand High barriers to entry Rising demand for all three segments 2 Lithium supply coming to market in next 5 years will not keep up with the demand, creating a lithium supply deficit 3 Market has assumed that prices will flatline after 2018 but lithium prices should continue to grow until supply catches up Capital to pursue M&A and Capex Diversified cash flows Other Valuation Levers: Underappreciated potential to expand via M&A University of Wisconsin 15

16 $/kwh Capacity in GWh Lithium Market Expansion From EV Adoption 1 Growth in lithium mainly driven by demand for li-ion battery for EVs EV Battery Prices & Manufacturing Capacity Automotive Manufacturers Price Sensitivity to Lithium Global BEV & PHEV Sales Estimate Lithium price $9,555 Content per vehicle (kg) 48 Estimated $ Cost per vehicle $ % % of battery cost 1.3% % of total production cost 3,500 3,000 2,500 2,000 1,500 1, % 6% 5% 4% 3% 2% 1% 0% Battery Price Manufacturing Capacity BEV PHEV Consensus Adoption Rate Commentary Commentary Costs of batteries are declining from improved technology and economies of scale The cost parity level between ICE and EV vehicles is estimated to be $100/kWh General Motors and Tesla expects battery cost to decline to that level in 2021 Automakers are likely to be insensitive to price changes since lithium is ~5% of overall battery cost EV adoption estimates are continuously revised upwards 22.5% Of 2016 Total Lithium Demand is Automotive ~49.1% Of 2021 Total Lithium Demand is Automotive Source: Bloomberg New Energy Finance, Deutsche Bank, GS Investment Research, IEA, Financial Times, Company Reports University of Wisconsin 16

17 Strategically Positioned to Capture Lithium Growth 2 Albemarle Lithium Supply Growth (Volume per Thousand Metric Ton) e 2018e 2019e 2020e 2021e Talison Expansion Talison Silver Peak La Negra Expansion 2 La Negra Expansion La Negra It takes 5 to 10 years to bring new lithium capacity to the market and the number of projects are just barely enough to keep up with the forecasted demand increase with electric vehicles Scott Tozier, Albemarle CFO Capacity Additions by 2021 (Volume per Thousand Metric Ton) Albemarle FMC SQM Orocobre Lithium Americas Source: Company Filings, Deutsche Bank, Morningstar 33 Other Commentary ALB s lithium capacity expansion will outpace biggest competitors Diversified extraction sources: lowcost brine and high-capacity mines University of Wisconsin 17

18 LCE kmt Price per LCE MT Forecasted Lithium Price Market has projected flatline lithium price growth after 2018 although lithium is projected to become more scarce 3 Lithium Supply, Demand & Price Demand Supply Surplus / (Deficit) ALB LCE Price Market Estimate 5% Growth Estimate (1) Market Estimate ALB Lithium Revenue / Market Estimate Lithium Supply Source: Dundee Capital Markets $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 ($2,000) ($4,000) Price Analysis LCE Market Price CAGR % E (1) 15.1% Market Estimate 2018E 2021E (1) 0% LCE Price Growth Implied Stock Price 0.0% $ % $ % $ % $ % $189 University of Wisconsin 18

19 M&A Potential Underappreciated opportunity to realize meaningful synergies via M&A M&A Targets (Lithium supply as of 2015) FMC 21% ALB 34% Purchase Multiple Analysis Completion Date Jan Purchase Price: EBITDA: Planned Synergies: Other 9% SQM 36% Realized Synergies: Source: Company Filings $6.7bn Company Name Market Cap. ($ millions) Galaxy Resources $716 Orocobre $645 Lithium Americas $491 Nemaska Lithium $347 Altura Mining $211 Bacanora Minerals $107 Lithium X Energy $102 $247mm $120mm $150mm Synergies Shared corporate overhead Economies of scale Manufacturing best practices Albemarle Purchasing Capability 1.0x Net Debt / EBITDA $1.0bn Cash or Cash Equivalents 27.1x Initial Baa Moody s Rating Purchase EV/EBITDA Multiple 20.8x Post Our investment plans are focused on organic investments in our lithium business and M&A opportunities Scott Tozier, Albemarle CFO University of Wisconsin 19

20 IV. Forecasts & Valuations

21 Lithium Revenue Forecast Lithium revenue projected to increase with electric vehicle demand and increase in lithium pricing Lithium Revenue Forecast ($ millions) $2,136 $ $760mm+ Increase in Lithium Demand Fueled by increase in electric cars Electric vehicle adoption of 6% in 2021 Growth of electric battery size of 1% Grid storage growth of 10% in large part due to solar power demand Industrial growth of 4%; includes greases, lubricants, glass, ceramics, etc. 2 3 $551mm+ $156mm+ Market Share Growth Albemarle will bring to market 40% of the new lithium in the next 5 years Most of new supply will come from La Negra expansion 2016 Market share: 32.9% 2021 Market share estimate: 36.4% Price Increase Rising demand with physical limitations limiting supply Price insensitive consumers, including car manufacturers Consensus pricing with 5% price increase per year from University of Wisconsin 21

22 Company Revenue Forecast Non-Lithium segments will contribute slightly to topline Company Revenue Forecast ($ millions) Lithium $4,331 $2, $31mm+ Performance Catalyst Solutions Competitive pricing environment GDP growth driven largely by plastics 2 3 $73mm+ $82mm+ Bromine Stable flame retardants demand across electronics, construction and automotive Excess bromine capacity by some supplier to limit Albemarle s growth Refining Solutions Oil dependence of the segments create difficult to forecast revenue growth University of Wisconsin 22

23 Comparable Companies Analysis Albemarle has less near-term projected growth but higher margins than peers Lithium Comparables Public Company Operating Metrics Revenue Growth 2yr CAGR EBITDA Growth 2yr CAGR 11.8% 12.3% 9.2% 12.0% 17.3% 12.8% Median Mean Albemarle LTM EBITDA Margin 21.4% Median Mean Albemarle 26.5% 4.1% Valuation Metrics NTM EV/EBITDA 17.7x 17.6x Median Mean Albemarle NTM P/E 32.1x 33.7x Valuation Metrics EV/EBITDA P/E Peer Group: 17.7x 33.7x Source: CapIQ Median Mean Median Mean Implied Valuation $ $ University of Wisconsin 23

24 DCF Analysis Conservative valuation leads to premium valuation DCF Analysis Assumptions Cost of equity of ~9% Pre-Tax cost of debt of ~6.5% 22% Tax rate Equity / debt capital structure of 82% / 18% Consensus EBITDA margin increases Consensus capex, D&A and net working capital performance Price per Share Sensitivity Long Term Growth Rate 141 US 2.0% 2.5% 3.0% 3.5% 4.0% 7.2% $ $ $ $ $ % $ $ $ $ $ WACC 8.2% $ $ $ $ $ % $ $ $ $ $ % $ $ $ $ $ Implied price per share of $157 today representing a mispricing of ~12.6% EBITDA % of Projection 90.0% 95.0% 100.0% 105.0% 110.0% 7.2% $ $ $ $ $ % $ $ $ $ $ WACC 8.2% $ $ $ $ $ % $ $ $ $ $ % $ $ $ $ $ University of Wisconsin 24

25 Valuation Summary High confidence in ~11% mispricing to current stock price Valuation Building Blocks Current Price $ Per Share Valuation Building Blocks DCF Valuation $157 Per Share Comparable Company P/E $158 Per Share Price per Share Range $ $ $ $ $ $ EV / Revenue Revenue Multiples 2016 $ 2, x 6.09x 6.30x 6.51x 6.72x 6.93x 2017E 3, x 5.39x 5.58x 5.77x 5.95x 6.14x Comparable Company EV/EBITDA $139 Per Share Price Target: Price Target: $155 EV / EBITDA EBITDA Multiples 2016 $ x 21.48x 22.22x 22.97x 23.71x 24.46x 2017E x 17.88x 18.50x 19.12x 19.74x 20.36x P/E Earnings Multiples 2016 $ x 24.56x 25.44x 26.32x 27.20x 28.07x 2017E $ x 34.11x 35.33x 36.55x 37.76x 38.98x University of Wisconsin 25

26 V. Risk Assessment

27 Risk Points Albemarle faces secular, internal and geopolitical risks Secular Internal Geopolitical Price competition between the three major players of Albemarle, FMC and SQM Growth rate of automotive industry and the adoption of EV vehicles Increase in new supply coming to market from competition in the next 5 years Crude oil price fluctuation Cybersecurity and intellectual property protection Potential weaknesses in development of future driver products including spodumene mining technology Labor agreement with miners and employees Contract agreements with Chilean, American and Australian governments for mining agreements Feasibility of success in the Argentinean exploration University of Wisconsin 27

28 Downside Lithium estimates sensitivity on a stand-alone basis Lithium Price Analysis LCE Price Growth Commentary Implied Stock Price 0.0% $ % $ % $ % $ % $189 Price competition between the three major players of Albemarle, FMC and SQM If demand and supply is balanced there could be a downward push on prices Albemarle Lithium Supply Analysis LCE Additions to Plan Commentary Implied Stock Price 80% $135 85% $141 90% $146 95% $ % $157 La Negra and Talison expansions could supply less lithium than expected Issues with conversion could result in less lithium coming to market Lithium Demand Analysis LCE Demand to Plan Commentary Implied Stock Price 85% $140 90% $144 95% $ % $ % $165 Slower EV adoption than expected could result in less demand University of Wisconsin 28

29 VI. Conclusion

30 Conclusion Investment Thesis Recommendation Electric vehicle (EV) adoption will drive market demand for lithium Limited near-term supply will create a supply deficit Market has improperly forecasted the price of lithium to account for this supply deficit Buy Current Price: $ Price Target: $155 Mispricing: ~11% University of Wisconsin 30

31 VII. Appendix

32 Appendix 1. Cover Page 2. Executive Summary 3. Table of Contents 4. Company Overview 5. Company Overview 6. Segments Overview 7. Company History 8. Company Evolution 9. Lithium Overview 10. Lithium Overview Cont d 11. Lithium Industry Overview 12. Lithium Industry Overview 13. Lithium Industry Overview Cont d 14. Investment Thesis 15. Investment Thesis 16. EV Adoption Forecast 17. Lithium Supply Forecast 18. Lithium Price Forecast 19. M&A Potential 20. Forecasts & Valuations 21. Lithium Revenue Forecast 22. Company Revenue Forecast 23. Comparable Company Analysis 24. DCF Analysis 25. Valuation Summary 26. Risk Assessment 27. Risk Points 28. Downside Analysis 29. Conclusion 30. Conclusion 31. Appendix 32. Appendix 33. Stock Overview 34. PCS Overview 35. Bromine Overview 36. Bromine Industry Overview 37. Refining Solutions Overview 38. Refining Industry Overview University of Wisconsin 32

33 Stock Overview Albemarle s stock price has increased 58% YTD driven by high growth prospects in the lithium market Key Metrics Indexed Stock Chart $15.2Bn Market Cap. Albemarle S&P Metals & Mining S&P % $ Per Share 175% 28.2x NTM P/E $ wk Range 100% Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 70% University of Wisconsin 33

34 Performance Catalyst Solutions (PCS) PCS produces steady cashflow under the Lithium Segment Overview Competitors Customers Produces catalysts used in the manufacturing of various goods including plastics, coatings, LEDs, etc. Acquired from Akzo Nobel in 2004 Accounts for 11% of total sales in 2016 Key Figures Applications $300mm 2016 Revenue 26% EBITDA Margin $78mm Adj. EBITDA Plastics Co-catalysts and finished catalysts used in the production of plastics Packaging, nonpackaging, injection molding Metals Organic metal products used in LEDs and solar cells Other Curing agents used in polyurethanes, epoxies and other engineered resins University of Wisconsin 34

35 Bromine Bromine operates in a mature industry offering ~2% growth per year Key Figures $792mm 2016 Revenue $227mm Adj. EBITDA Customers 40+ Products 2% YOY Rev. Growth 29% EBITDA Margin Raw Materials Magnolia, Arkansas Safi, Jordan China Competition Will be able to produce bromine in Arkansas for 50 years+ 50% interest in Jordan Bromine Company Limited ( JBC ), a consolidated joint venture with operations in Safi, Jordan Bromine from the Dead Sea has near indefinite quantities of brine Applications Joint venture with Weifang Sinobrom ( Sinobrom ) in China gives it the option to source bromine directly from China s Shandong Province brine fields Sold to 1. Chemical manufacturers 2. Drilling and oil service companies 3. Beef and poultry processors 4. Water treatment 5. Photographic companies 6. Energy producers Israel Chemical Fire safety solutions Coatings Insulation Mercury Control University of Wisconsin 35

36 Bromine Industry Overview Albemarle is one of the few players in the mature bromine market Bromine Industry Outlook ($ billions) $3.96 $ Bromine Key Players ($ billions) Company Market Capitalization Bromine is projected to reach 716 kilotons of global volume by 2022 Growth is attributed to: Growing use of bromine in mercury mitigation Increasing demand for flame retardants due to increasing stringent fire safety standards Bromine Concentration Bromine is a mature industry in which Albemarle is well positioned to capture future growth Chemtura (CHMT) Private Israel Chemicals (ICL) $5.6 Albemarle (ALB) $15.2 Source: Markets and Markets University of Wisconsin 36

37 Refining Solutions Revenue from sales of oil refining catalysts heavily influenced by oil prices Overview Engages in refining solutions via cracking A refining is the process of taking crude oil and breaking it down into useful forms Segment consists of heavy oil upgrading and clean fuels technology Process Overview Superheated Catalysts are Crude oil and Crude oil is catalyst are boiled Refined products crude is pumped pumped into pumped into at different exit distillation into distillation distillation boiler temperatures and column column column broken down Key Figures $732mm 2016 Revenue $239mm Adj. EBITDA Crude Oil 20 o c 40 o c 70 o c 120 o c Distillation Column Carbon Gas Naptha Gasoline Kerosene Diesel 0.41% YOY Rev. Growth 32.65% EBITDA Margin 1 Boiler o c 300 o c 600 o c 3 Cracking Unit 5 Lubricating Oil Heavy Gas Oil Residual University of Wisconsin 37

38 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Refining Solutions Industry Overview Increased margins and favorable crack spread prices create favorable industry dynamics Refining Solutions Industry Outlook ($ billions) $6.98 $5.61 Oil prices have remained relatively constant last 24 months 3:2:1 Crack spreads are a measure (using crude, gasoline and diesel as inputs) of the refining industry profitability Albemarle s refining solution segment operates in oil refining industry with favorable tailwinds :2:1 Crack Spreads Future Pricing $25 $20 $15 $10 $5 Refining Solutions Key Players ($ billions) Company Market Capitalization W.R. Grace & Co. $5.0 BASF SE $97.6 Haldor Topsoe Private Albemarle $15.2 University of Wisconsin 38