Novonix: New customer but production ramp pushed

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
02 February 2022, 8:45 AM
Sectors Covered:
Industrials, New Energy

  • NVX has announced its first commercial scale binding offtake agreement with KORE Power along with its 2Q report.
  • We think ramp up of production is likely to take longer though with the first two Generation 3 furnaces being installed this quarter.
  • We maintain our HOLD rating with a reduced target price of $6.97ps (-5%) and our base case DCF valuation is also lower (-5%) (login to view). Our higher target price reflects the market's enthusiasm for the thematic but we consider NVX a high risk investment.

KORE buyer and investment opportunity

NVX has entered a binding anode sales agreement with KORE as well as purchasing 5% of the company in a 50/50 cash/scrip deal for US$25m.

Supply will commence in 2024, starting at 3ktpa and ramping to 12ktpa in 2027 for an initial five-year period. KORE is an unlisted company that intends to build a 12GWh cell manufacturing facility in Arizona.

Cash spend rate accelerated in 1H

NVX spent $15.7m ($8.6m more than Morgans forecast) on operating activities and $112.4m ($22.5m more than Morgans forecast) on investing activities. Headcount has doubled in the Battery Testing Services (BTS) division and corporate overheads were pushed higher by one-offs and underlying increases.

Spend on PPE was similar to our expectations ($94m vs $90m forecast) but an additional $18m was paid as security for future activity.

NVX finished the quarter with $260m cash available so it has plenty of headroom to continue to expand its production capacity.

Forecast and valuation update

We have factored in higher ongoing operating costs in FY23 of ~$12m which scales upwards with increasing production.

NVX mentioned in its quarterly that its first Generation 3 furnaces will be installed this quarter which will delay the delivery of material to Samsung and Sanyo. We have therefore pushed back our estimated ramp up by six months, reducing our FY23 forecast production by 4.4kt.

There is little publicly available information on KORE so it is difficult to value. We therefore have included the investment at book value, or $35m (7cps) at an assumed exchange rate of 0.71 AUD:USD.

The combined effect of these changes lowers our risked valuation (base case) to XXX (login to view) and the unrisked valuation (target price) to (login to view).

Investment view

NVX offers ASX investors an opportunity to get direct exposure to the North American battery market. The share price exceeds the value of our base case DCF valuation but it has had a tendency to push higher on positive news. Should NVX secure a major customer like Samsung or Sanyo then the stock could push higher on positive sentiment.

We think that once any potential momentum stalls though the price will be vulnerable to pull backs and we maintain our HOLD rating. NVX's share price has shown very high levels of volatility which we think will continue.

Price catalysts

  • Offtake agreement with an established customer like Samsung or Sanyo.
  • Development of cathode, or other, intellectual property.

Risks

  • Installation and commissioning of the next anode production plant.
  • Further delays to the Samsung quality audit.
  • Securing new customers.
  • Costs of raw materials in anode production (petroleum coke, electricity, etc).
  • Interest rates and tax regimes.

Find out more

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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