Weekly Reports | May 12 2023
Lithium merger may prompt industry consolidation; preferred lithium stocks; Amazons threat to Aussie retailers & the US debt negotiations.
-Will the Allkem merger prompt further industry consolidation?
-Wilsons' preferred lithium exposures
-The threat posed by Amazon to local retailers
-US debt limit compromises may bring forward rate cuts
By Mark Woodruff
Will the Allkem merger lead to further industry consolidation?
Following the announced merger of Allkem ((AKE)) and US-based Livent Corp, Wilsons anticipates consolidation will become an ongoing theme for the Lithium sector globally.
The new merged company will become the third largest lithium producer globally and have exposure across the spectrum of spodumene, carbonate, hydroxide and specialty lithium chemicals.
Scale is needed across the industry, in the brokers view, to meet de-carbonisation and energy transition needs, and themerger may prompt increasing interest from traditional mining houses that have been reluctant to invest in the space.
The almost complete lack of presence from major miners to date is because the lithium market lacks size, explainsWilsons, something the bigger players prefer so they may utilisestrong balance sheets, which provide akey point of differentiation.
Smaller markets such as lithium also screen poorly because large-scale additions to supply can have an outsized impact on market dynamics, which often presents an unacceptable risk, explains the broker.
As the industry grows-up, Wilsons expects this situation will evolve as certain key strategic advantages accrue from achieving scale. These include diversification of project risk and more cost-effective access to capital.
Scale also allows greater access to early-stage exploration opportunities, notes the analyst, and broader technical capacity to pursue and develop them.
Wilsons onthe Lithium sector and preferred stocks
This week, Wilsons initiated coverage on the Lithium sector and five individual stocks.
The brokers view of the industrymay be best summarised as follows: we remain principally focussed on the longer-term structural thematic drivers and are confident that the low-carbon energy transition will drive expected compounding deficits in supply over the coming decades, which will underpin robust pricing over the longer term."
Wilsons expects lithium prices will exceed consensus estimates because most forecasters are reverting to long-term incentive price-driven forecasts, which is totally unsuited for application to the lithium market at present.
Before such a forecasting technique is adopted, markets must be in long-term equilibrium, explains the analyst. Its thought even those with a bearish stance wouldnt consider lithium supply/demand is even remotely close to attaining equilibrium over the next 5-10 years.
From stocks under its research coverage, Wilsons maintains its preference for Leo Lithium ((LLL)) and Atlantic Lithium ((A11)).
The broker also has an Overweight rating on ioneer ((INT)), while Liontown Resources ((LTR)) and Core Lithium ((CXO)) are assigned Market-weight status.
To find the brokers newly-set 12-month target prices for these companies, please refer to todays Broker Call *Extra* Edition on the FNArena website.
The threat posed by Amazon to local retailers
Should Amazon Australia attain metrics in the long term similar to those already achieved in the UK and the US, it would become the fourth largest retailer behind Woolworths Group ((WOW)), Wesfarmers ((WES)) and Coles Group ((COL)).
Having raised this possibility, Jarden is cautious on companies with exposure tohousehold goods such as JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Nick Scali ((NCK)), Kogan.com ((KGN)) and Temple & Webster ((TPW)), as well as those lacking clear competitive differentiation.
Some small Retail REITS are also likely at risk, suggest the analysts, if they do not invest in distribution capabilities.
A near-term game changer for Amazon in Australia is its Prime service which will open up new markets and impact incumbents with exposure to office, electronics, fashion, house & garden and recreation, explains Jarden.
The broker points out consumers are increasingly citing value as a key driver of engagement with Amazon Australia.
The value proposition is being driven by free delivery with Prime and the streaming offer, as well as the extensive range and low pricing. Same-day delivery across Sydney and Melbourne is alsoincreasing the total addressable market and lifting customer retention.
Jarden observes consumers are trading down in grocery and delaying big purchases, and Amazon is increasingly becoming the first port of call for price comparison.
Jarden now expects Australian gross merchandise value (GMV) for Amazon will be close to $5bn in 2023, up more than 25% year-on-year, and will account for around 15% of all non-food retail growth. The sub-sector impact onRetail will be most significant across the categories ofOffice, Grocery and Fashion.
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