EUR 850.00 For Business Accounts Only

Morningstar | Wesfarmers Continues Foray into New Technology Acquisitions; FVE Increases to AUD 30

Wide-moat-rated Wesfarmers continues efforts to diversify its portfolio away from retailing with its latest proposed deal. The conglomerate has now attempted two acquisitions of resource companies since Rob Scott took the helm. Unintended or otherwise, both acquisitions would expose Wesfarmers to the high-growth electric vehicle, or EV, market, a move which certainly has strategic merit. We forecast EVs to grow to 15% global penetration of new car sales in 2028 from 1% in 2017. Following the offer for rare-earth elements miner and processor Lynas Corporation in March 2019, Wesfarmers has made a friendly bid to acquire ASX-listed Kidman Resources. Based on our estimates for Kidman, this looks like a good deal. Our estimated net present value, or NPV, of the project significantly exceeds the bid price. We raise our fair value estimate for Wesfarmers by 7% to AUD 30 per share, but at current prices, shares remain overvalued.

Wesfarmers is proposing to acquire Kidman Resources for AUD 1.90 per share, a 47% premium to the closing price on 1 May 2019, representing a transaction value of AUD 776 million. Kidman Resources' key asset is its 50% stake in the Mount Holland lithium mine joint venture with narrow moat-rated Sociedad Quimica Y Minera De Chile, or SQM. Based on our lithium price forecasts and Wesfarmers' WACC of 8.4%, we calculate the NPV of Kidman's stake in the project of AUD 2.1 billion. This compares with the October 2018 prefeasibility study's NPV of the entire project of USD 2.3 billion at a discount rate of 10%, or AUD 1.6 billion for Kidman's 50% stake.

The proposal is supported by both the Kidman board and Chile-based SQM and is conditional on due diligence and Kidman shareholder approval.

As outlined in our November 2018 special report "Put the Pedal to the Metal for Lithium Stocks," our long-term lithium carbonate price forecast of USD 12,000 per tonne in real 2018-dollar terms, is well above the market's price-implied expectations for lithium miners in our coverage list, including SQM. We forecast Kidman’s lithium hydroxide product to command a 10% premium over lithium carbonate long-term. Current spot prices for lithium carbonate and hydroxide are USD 11,200 and USD 13,700 per tonne, respectively, representing a 22% premium for hydroxide. We forecast lithium demand growing at a 19% CAGR over the next decade, underpinned primarily by increased battery demand from snowballing electric vehicle penetration.