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In Brief: Lithium, Grocery Stocks & Pathology

Weekly Reports | May 19 2023

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

Citi materially raises its lithium forecast; a positive outlook for the Australian grocery market & tailwinds for pathology-exposed ASX stocks.

-Why lithium prices should rally 25-40% by year’s end
-Jarden’s positive outlook for the Australian grocery market
-Citi raises targets for pathology-exposed ASX companies 

By Mark Woodruff

Why lithium prices should rally 25-40% by year’s end

Lithium carbonate domestic prices in China have rallied 25% to US$28,000/t in the last two weeks amid improved sentiment.

Citi continues to believe active restocking in the battery supply chain in the second half of 2023 will support higher prices and forecasts a further 25-40% rally to around US$35,000-40,000/t by the close of 2023.

Prices have declined by around -70% in the last five months before touching lows of US$21,000/t, close to cost support levels for lepidolite supply in China, points out the broker.

There are higher impurities and less lithium oxide content in lepidolite ores compared with spodumene.

Apart from improving sentiment, Citi attributes the recent price rally to tight supply in the industrial carbonate market, attractive export arbitrage, lower inventories in the supply chain, recovering electric vehicle (EV) sales and demand from physical traders.

China’s sales of EVs are improving, observes the broker, after a lacklustre start to the year, with April sales showing strong year-on-year growth momentum. 

While downstream demand for lithium chemicals from cathode and battery players remains muted, despite improved buying interest, demand is expected to lift as order books for battery producers improve.

Citi predicts a nominal surplus for lithium this year though a deficit remains a chance as labour shortages, permitting issues and mining technicalities have impacted on spodumene production in Australia.

Also, supply has been sharply cut out of some African countries, explains the broker, after last year’s higher prices resulted in unregulated artisanal/direct shipping ore supply into China.

A positive outlook for the Australian grocery market

Right now, forecast growth looks too low across all the ASX-listed grocers and valuations are not overly demanding, suggests Jarden.

Contrary to the consensus view, this broker believes the outlook for the Australian grocery market is positive, particularly for retailers (not so much suppliers), with inflationary and demand tailwinds set to drive revenue upside.

Jarden formed this opinion after surveying 70 fast-moving consumer goods (FMCG) industry participants on trading, promotional intensity and outlook. 

Furthermore, the duopolistic nature of the grocery market means it should remain rational and ultimately lead to margin expansion, suggest the analysts. Irrational behaviour led by increased discounting has been apparent in the UK, but not the US. 

Jarden now forecasts market growth of 6-8% due to the combination of 3% inflation, greater than 2% population growth and normalisation of the eating-out-of-home trend.

Added to this rosy picture, overseas peers continue to see improving performance, with Australia lagging the US, explain the analysts. Share prices in the US keep outperforming those in A&NZ, reflecting operating leverage coming through.

Costs relating to pallets and logistics should be more than offset by stronger revenue, along with improved terms, predicts Jarden. Retailers are squeezing supplier margins with 51% of surveyed suppliers seeing pressure on terms.

Higher rates of theft and wages inflation are the main concerns. 

Jarden is overweight the sector and Woolworths Group ((WOW)) is the preferred exposure given its superior medium-term capabilities (e.g. data, media, loyalty), while Metcash ((MTS)) is second-ranked for its attractive valuation and conservative market forecasts.

Coles Group ((COL)) should also do well, as should The Reject Shop ((TRS)), Costa Group ((CGC)) and Lynch Group ((LGL)), in the broker’s view.

Respondents to the survey expect Aldi to be the number one performing retailer over the next 12 months, followed by Woolworths and Amazon. Jarden is increasingly hearing of instances where retailers are looking for increased promotional funding, particularly to combat Aldi.

For detail on Jarden’s latest 12-month target prices for the above-mentioned companies, please go to Broker Call *Extra* on the FNArena website.

Targets raised for pathology-exposed ASX companies 

Following the covid-testing boom, margins have been a key area of concern for investors in pathology-exposed Healthcare companies on the ASX.

Citi attributes this worry to employee costs, which account for around 45-50% of revenue, while that same revenue is not indexed to inflation.

However, the analysts now forecast demand for pathology testing will return to long-term trend, driven by population growth, an ageing population and an increase in prevalence of chronic diseases.

The Australian population will grow at 1.2% per year to FY30, forecasts Citi, with potential upside from higher levels of immigration, while the use of pathology services per capita should accelerate on population ageing and a post-covid recovery in tests per capita.

Industry growth has traditionally been driven by volume growth as the impact from pricing/mix has generally been neutral to a small positive, explains the broker.

Between FY23 and FY30, the analysts forecast compound annual growth rate (CAGR) for the Pathology industry will accelerate to more than 5% per year, up from around 4.4% in the period FY09 to FY19.

As a result, Citi increases its earnings forecasts and target prices for Sonic Healthcare ((SHL)), Australian Clinical Labs ((ACL)) and Healius ((HLS)). Please refer to the Broker Call Report or Stock Analysis on the FNArena website for target changes.

Both Sonic Healthcare and Australian Clinical Labs have issued guidance suggesting margins are returning to pre-pandemic levels, and Citi adopts this outcome as its base case. 

The broker anticipates second half results will provide greater clarity on management of costs in an inflationary environment.

On one hand, higher inflation for longer without an increase in funding, will negatively impact margins, while on the other hand, higher volume growth will boost margins given the high fixed cost nature of the industry, explain the analysts.

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ACL CGC COL HLS LGL MTS SHL TRS WOW

For more info SHARE ANALYSIS: ACL - AUSTRALIAN CLINICAL LABS LIMITED

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