Umicore: Growth Materials Leadership, Expensive Rating (UMICF)

Belgian specialty chemical company Umicore (OTCPK:UMICF) has finalized a joint venture to produce battery materials with PowerCo, the battery unit of Volkswagen (OTCPK:VWAGY).Terms of contract Volkswagen has performed surprisingly well, offering a guaranteed return on investment for Umicore’s long-term production goals. This not only significantly de-risks its revenue growth prospects, but also underscores the company’s competitiveness in the EV space. With at least one more major announcement expected in the second half of 2022 (heralded at this year’s Capital Markets Day event), Umicore’s growing leadership in cathode materials is compelling.

That said, this year’s rise in commodity prices for platinum group metals and nickel looks set to reverse in the coming months, with more risks than rewards to the prospects. A valuation of up to 10x EV/EBIT (or up to 7x EV/EBITDA) seems a bit expensive, as it also increases balance sheet risk.

Joint Venture of Umicore and Volkswagen Completed

Umicore establishes joint venture with PowerCo to produce battery materials in Europe for Volkswagen Unified Cell program, a ‘prismatic’ EV battery cell design expected to reduce battery costs by up to 50% made it clear that Under the terms of the deal, the joint venture will be set up as a 50/50 joint partnership of his, but Umicore will effectively gain control through his one-share advantage over Volkswagen/Powerco and the ability to manage operations and appoint a CEO. Take control. .

Another positive surprise from the announcement is that the JV also spans the precursor cathode active material (pCAM) and purification. Finally, Umicore is granted exclusive supply of his first 60GWh of purified material for pCAM production. However, capex spending is huge for him at €3bn (of which he will have €2.5bn by 2026), significantly compared to his €5bn capex program announced at his CMD this year. is the amount of The entire program will be jointly funded by Umicore and PowerCo, but is likely to incur a significant capital expenditure burden and may require new bond issuances and/or equity raisings first. .

An important milestone in our long-term cathode materials strategy

By first announcing its intention to establish a joint venture in December 2021, this is an important step in Umicore’s long-term cathode materials strategy with a production target of 400GWh by 2030.

JV production is expected to start in 2025, with a planned nameplate capacity of 40GWh in 2026 before increasing total capacity to 160GWh in 2030 (a schedule consistent with previous announcements). From a strategic point of view, the willingness of a major manufacturer like Volkswagen to bring two-thirds of Europe’s battery materials demand to Umicore proves the company’s strong competitive position. The economics of JVs are also attractive. With an annual investment of 160GWh, Umicore will get a guaranteed minimum value-enhancing return backed by a take-or-pay contract. This translates into an attractive 12.5% ​​pre-tax return on capital employed (or approximately €150m/year by 2030), significantly de-risking the company’s cash flow profile and avoiding revaluation. Boost evaluation cases. There’s also another major announcement (perhaps another partnership) for later this year, and all signs point to Umicore emerging as a serious competitor in the cathode materials space.

Increased short-term financial risk

Umicore looks to be having another strong year on the back of rising commodities. Recall that, building on its strong performance in the first half of 2022, the company delivered a profit in excess of his FY22 consensus of €828 million. In the short term, however, it will depend on continued strength in metals prices, and lithium price growth above 400% year-on-year in the first half of 2022 is unlikely to be sustainable. Despite lower battery sales volumes and a double-digit drop in platinum group metals prices since the April update, lithium has driven the significant increase in guidance, so it remains revised downwards going forward. remains at high risk of Also, the current guidance numbers do not anticipate a material deterioration in the macro environment or disruption to Umicore’s operations, increasing downside risks.

Beyond P&L, according to Umicore’s recent CMD announcement, €5 billion in growth capex by 2025 to fund the expansion of its battery footprint will have a significant impact on FCF generation and its balance sheet. pose a risk. Even in our base-case macro scenario (i.e. shallow recession/slowdown), an elevated run rate is likely to be accompanied by negative free cash flow from the following year, with positive generation occurring only after the investment cycle ends in 2025. can occur. Without additional financing, the leverage level (net debt to EBITDA) would increase significantly. In the best case, Umicore will extend its runway through government subsidies and lower working capital requirements related to rechargeable battery materials. But the more likely scenario is that the cost of debt financing rises against the backdrop of rising interest rates, diluting equities at the expense of shareholders.

Expensive Valuations Outweigh Growth Material Leadership

Based on this year’s price gains across key commodities (such as platinum group metals and nickel), Umicore looks poised for a strong full-year earnings report. The company’s competitiveness in cathode materials is attractive, in part due to the joint venture approval it received from Volkswagen (via its PowerCo battery unit) on favorable terms. That said, the medium- to long-term investment case looks grim. In particular, there are already signs of a cyclical decline in commodities, which could lead to a global recession in the coming months. Given the low earnings visibility and potential balance sheet stress from the difficult transition to EV, a valuation of around 10x current EV/EBIT (around 7x EV/EBITDA) is a good buy for investors. provides a limited safety margin for