Buy Hold Sell: 5 emerging leaders for your watchlist
If there is one word that can be used to describe this anonymous producer of your favourite finance show on the web, it's generous (or perhaps, extremely needy and desperate for your approval).
That's why when you ask, we listen (and intently so). In December, we surveyed more than 4000 Livewire readers, and you told us there was one theme that deserved our attention - decarbonisation. And we're certainly not one to dispute the crowd.
It makes cents (literally). Serious money is flowing into renewable energy around the globe. In fact, Calastone found that ESG funds were the major beneficiaries of Australians' savings in 2021, with net new capital invested in ESG equity funds more than quadrupling year-on-year to $3 billion.
So in this episode, Livewire's Ally Selby was joined by two sustainable investment experts - Stephane Andre from Alphinity and Mike Murray from Australian Ethical - for their analysis of three ASX-listed stocks for exposure to decarbonisation.
Plus, we also asked our guests to each name one company that they think could become a decarbonisation leader over the years to come.
Note: This episode of Buy Hold Sell was shot on Wednesday 27th April 2022. You can watch the video, read an edited transcript or listen to the podcast below.
Ally Selby: Hello, and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're going to be taking a look at some of the best locally listed stocks for exposure to decarbonisation. Why decarbonisation, you ask? Well, in December, 62% of surveyed readers told us that they were thinking of investing in this exciting megatrend in 2022. So today we are joined by Australian Ethical's Mike Murray, and Affinity's Stephane Andre, for their thoughts on five market-leading stocks.
I have got to let you guys in on a secret here. We actually really struggled to find Aussie stocks with exposure to decarbonisation, other than your classic battery material stocks. Mike, I might start on you. Do you think this landscape's going to change over the coming decade and are the current leaders, the ones that we have, going to be the leaders of tomorrow or are there going to be new entrants to the market?
Mike Murray: Well, firstly, the leaders of today are never the leaders of tomorrow in the stock market, in economic history.
But I think when you step back, the scale of the opportunity is enormous. We need, as a planet, to increase our expenditure on clean energy solutions from something like $1 trillion per annum to $4 trillion per annum over the next decade.
And so that's just going to have to create opportunities, but it's also going to mean that it's going to touch just about every single company in the investing landscape, whether you're a bank, whether you're an insurance company, whether you're a boring old supermarket, no offence to supermarkets. So I think you're going to see a range of impacts across established companies and there are going to be a whole lot of new industries in abatement, in energy measurement and control that haven't even been created yet.
Ally Selby: We've seen this excitement around battery materials over the past few years. Is there another sector that you think looks really compelling right now in this decarbonisation space?
Stephane Andre: In Australia, for the moment, most of the opportunities are really happening on the whole metals and mining side, where basically you have the extraction of the minerals, which facilitate EVs, batteries and so on.
I think over time, you're going to have some players who are going to invest and are making investments to back their net-zero commitments - seeing opportunities in energy, for instance, in hydrogen and ammonia.
These are still very small investments, but over time we expect them to be much bigger and eventually become investible. But for the moment, it's a tiny part of the market.
Sims (ASX: SGM)
Ally Selby: Okay. Let's get onto some stocks. First up we have Sims, which is a global leader in metals and electronics recycling and is actually emerging as a leader in the renewable energy industry as well. Stephane, I might start on you. Is it a buy, hold or sell?
Stephane Andre (SELL): It's a sell for me, at this stage. I really like the thematic of scrap, which is being used in electric arc furnaces - that reduces the carbon emission from steelmaking by 80% versus blast furnaces. Management has done a very good job in terms of positioning the company for growth, a strong balance sheet and so on. But however, I think that the economic cycle is kind of slowing down. Scrap prices are cyclical. They've benefited from very strong prices. The stock has rallied 55% over the last six months, which has been a very good performing stock, but I would take some profit at this stage, even though the thematic is pretty good.
Ally Selby: It's actually risen around 22% in 2022. Over to you, Mike, is it a buy, hold or sell?
Mike Murray (HOLD): It's a hold for us, and we do hold it across a number of our strategies. And the reason it's not a buy is, as you pointed out, Ally, it's been a good performer this year. There are a couple of things we really like about this company from a decarbonisation perspective. Scrap metal is a very low carbon alternative to pig iron in the steelmaking process. They are exposed to a number of other important transition minerals that will be, again, important to future technology. And they've got a number of new businesses around recycling of electronic waste and landfill gas that also make them an important company in this part of the market. So we're looking for an opportunity to re-weight into that company.
Pilbara Minerals (ASX: PLS)
Ally Selby: Next up, we have a crowd favourite, it's lithium producer, Pilbara Minerals. Its share price is down around 25% in 2022. Should investors be using this as an opportunity to buy the dip? Mike, is it a buy, hold or sell?
Mike Murray (HOLD): Again, Ally, it's a hold for us. We were buyers of Pilbara at around 70 cents and it's been a wild ride. I think it fell to 15 cents and then up above $3 and now around that $2.50 level. There's a lot to like about the position of their resource. It's positioned reasonably well on the cost curve. Lithium demand is growing probably in excess of 20% per annum due to EV uptake and the market in deficit. When I look at spodumene, the price is currently around that US$5,000 per tonne level. In the long run, we think that will settle somewhere between US$800 and US$1,000 per tonne. So it's just moved a bit hard on the upside for us.
Ally Selby: Its CEO, Ken Brinsden, actually recently announced he's going to retire. Over to you, Stephane. Is it a buy, hold or sell?
Stephane Andre (BUY): It's a buy for me. I still really like the dynamic of lithium. I completely agree with Mike. The growth and demand are going to be significant. Some forecast six times growth between 2020 and 2030. Supply is there, but it's going to take time to ramp up the supply. So I think there's going to be a deficit in lithium for quite a few years. So that means elevated prices of lithium for longer. The company is aiming to triple its production between now and the next five years. So that's also a strong growth. We think earning surprise and there's going to be a lot of cash flows. Capital management is also going to be featured here on this stock. So for us, earning surprise on price, volume, and capital management, it's a buy.
Carbon Revolution (ASX: CBR)
Ally Selby: Last one for today is a company called Carbon Revolution. It may seem slightly left field, but it actually has commercialised the supply of lightweight carbon fibre wheels to the auto industry, which actually reduces the energy required to get around in your car. Stephane, over to you. Is it a buy, hold or sell?
Stephane Andre (BUY): It's a buy. And as you mentioned, with the carbon fibre wheels they have reduced the weight of these wheels, they are 40% lighter than aluminium wheels. And that's a huge benefit when you think about EVs. It means longer range. So while for the moment they're selling these wheels - which are very expensive - to high-end car manufacturers like Ferrari. Over time, we think that with scale, the cost is going to go down and it will become far more mainstream. We've seen that with airbags, ABS, eventually they become mainstream. We think that the target market is massive. When you think about energy efficiency, it can be used for cars, trucks, and even aviation. So a very interesting profile. It is a small-cap and therefore a stock that is rated on the lower side in terms of the positions for us in the portfolio, but it's a buy.
Ally Selby: While its addressable market may be massive. Its share price hasn't performed very well at all. It's down 42% year to date. Mike, over to you. Is it a buy, hold or sell?
Mike Murray (SELL): Look, it's a sell for me, Ally. I think it's an interesting technology and I think it's a global leader in its space. Just following on from Stephane, the price of their end product is quite high at the moment and they are burning quite a lot of cash. I think they've burnt about $45 million year to date and it has a market cap of around $130 million. So that equation I think is quite tough. There's not a lot of room for error there and a number of things have to go right for this company to scale successfully, but I hope they're successful.
Ally Selby: I like that sentiment. You hope they're successful. We asked you to bring along one stock that you think could become a future leader in the race to net zero. What have you brought for us today?
Contact Energy (ASX: CEN)
Mike Murray (BUY): Look, I'm going to say I'm quite excited about this company, but it's a bit of a utility-style company, so those two things normally don't go together. It's hard to get excited about the utility space. We actually invest in New Zealand as well as Australia. And one of the companies or the dualistic companies that we look at is Contact Energy. They're about an 80% renewable company, and that mirrors the New Zealand energy landscape. They get about 85% of their energy from renewable sources, hydroelectric and geothermal, etc. But really what's exciting here is the opportunity to grow that. We think that'll grow from about 85% of renewables in New Zealand to about 95%. And so these boring style utilities are actually turning into growth companies.
And so you look at a company like Contact Energy. You're not paying a big premium for that business. It trades on about 12.5 to 13 times EBITDA, but it's already raised capital and it's investing that in growth assets. So you may be getting growth in your dividend there with about 4% per annum on a healthy 4% dividend yield, and that's why we like it.
Ally Selby: Okay. Over to you, Stephane. Which locally listed company do you think investors could use to get exposure to decarbonisation?
Lynas Rare Earths (ASX: LYC)
Stephane Andre (BUY): Lynas is the one I'm proposing, which is a buy for me. It is really at the sweet spot of decarbonisation and geopolitical diversification. So when you think about decarbonisation, rare earth is really critical for wind turbines, electric vehicles and so on.
In terms of the geographical side, most rare earths, around 80%, are produced and treated in China. Lynas is the only large manufacturer or producer of rare earths outside of China. And that has value geopolitically from a more geographic diversification perspective.
Why do we like it? First, in terms of the outlook on rare earth, we think that the price is going to stay higher for longer. Demand is very, very strong here. And two, production-wise, we think that actually, Lynas will come out with some surprise announcements of how they can really beef up the production volume that they will be aiming for in the next five years.
Ally Selby: Okay. That's all we have time for today. We hope you enjoyed that special decarbonisation episode of Buy Hold Sell. If you did, why not give it a like. Remember to subscribe to our YouTube channel. We have so much great content coming over the next few weeks.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.