Why is the Allkem share price bolting out the gate on Monday?

The Allkem Ltd (ASX: AKE) share price has performed well today and is now trading around 3% in the green at $15.39.

Investors have rallied behind the share today on no news. So what’s the deal? And does Allkem represent compelling value as an investment right now? Let’s take a look.

Allkem share price edges higher

Whilst there’s been no market-sensitive information released today, the price of lithium carbonate continues to be a standout amongst the ASX lithium basket.

Whilst most other commodity baskets have cooled off in recent months, prices for the unrefined battery metal have nudged back to its all-time high of A$105,860 per tonne today.

A number of catalysts have weighed in, but most notably, the asymmetry in the demand for electric vehicles (EV) and supply of lithium is chiefly responsible for the upside.

It places serious doubts over Goldman Sachs’ projections earlier in the year calling for the end to the battery metals bull market, and that the lithium trade had been exhausted.

However, as it goes in markets, a fresh set of catalysts has emerged and this includes legislative changes in the U.S. under the ‘inflation reduction act’ that sees tax breaks for EV owners.

And zooming out, we can see the strengths across the board in the ASX lithium basket, trends that have been building on each other for some time now.

For Allkem, the number of buyers still bidding up lithium shares has been tremendously positive, with the share recently kissing its 52-week high of $15.99 on 13 September before pulling back to range.

Does the Allkem share price represent value?

Firstly, Allkem came in with a strong set of numbers in its FY22 annual report. Looking at the cash flow statement, it printed net cash from operations of $396 million, up from $45 million the year prior.

Meanwhile, capital expenditures (CAPEX) was up 64% year on year to $161 million made up of additional investment in property, plant and equipment (PP&E).

It brought this down to a net income of $324 million and also realised free cash flow of $294 million, each up more than triple digits from last year.

The share is also trading at a 19.7 times price-to-earnings ratio (P/E) and it is priced at 2.15 times book value of equity (P/Book).

Compared to the GICS Metals & Mining Industry median P/E and P/Book, the share is trading at a premium of 55% and 2.4% respectively.

Allkem is also trading at a premium to its 3-year P/E and P/Book historical averages by 42% for both, according to Refinitiv Eikon data.

Hence the question becomes if these figures do represent value, or if the slight premium relative to peers and historical averages is justified by the company’s strong FY22 performance.

Brokers remain tilted bullish with 9 out of 14 analysts still advocating to buy, down from 11 saying it’s a buy one month ago, per Refinitiv.

However, the consensus price target is $16.53 from the list, indicating a small amount of upside to be captured if the group is correct.

Net-net, it appears as if there’s a case to be made for the share to be trading at a premium. However, a further pullback in the Allkem share price would bring the multiples listed above closer to the peer group.

In the meantime, the Allkem share price has lifted more than 64% in the past 12 months.

The post Why is the Allkem share price bolting out the gate on Monday? appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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