Broker says buy ASX 200 lithium share Allkem for 34% upside

a man raises his fists to the air in joyous celebration while learning some exciting good news via his computer screen in an office setting.

a man raises his fists to the air in joyous celebration while learning some exciting good news via his computer screen in an office setting.

The Allkem Ltd (ASX: AKE) share price is edging higher on Wednesday.

In morning trade, the ASX 200 lithium miner’s shares are up 1% to $11.47.

This may have been driven by bargain hunters swooping in after Allkem’s shares sank almost 13% in February.

One broker that is likely to approve of investors buying the company’s shares today is Goldman Sachs. It has just released a note that tips the ASX 200 lithium giant’s shares to rise materially from current levels.

Allkem share price tipped to rocket

According to the note, the broker has responded to the company’s half-year results release by reiterating its buy rating with a $15.40 price target.

Based on the latest Allkem share price, this implies potential upside of 34% for investors over the next 12 months.

What did the broker say?

Goldman was pleased with the company’s performance in the first half. It commented:

AKE reported underlying EBITDA/NPAT of US$433mn/US$210mn (excl. eliminations/ incl. NCIs) was +3%/-1% vs. our US$421mn/US$213mn estimates and +3%/-10% vs. Visible Alpha Consensus Data of US$422mn/US$234mn, with operating assets in line with expectations.

The broker also highlights that Allkem is expecting lithium prices to remain strong for the current quarter despite recent weakness in spot prices. It adds:

AKE reiterated their 3Q pricing guidance of ~US$53,000/t for third party Olaroz sales and 5% increase in realised spodumene pricing. On recent pricing movements, AKE pointed to regional indices convergence, geographic exposure, and pricing lags as potentially shielding them this half from recent Chinese chemicals price declines, highlighting their portfolio is mostly contracted sales (~80%/20% contracted/spot) with volumes mostly to China and Japan/Korea, with some spot volumes to Europe and North America.

Why buy Allkem shares if lithium prices will decline?

While Goldman’s analysts “continue to expect lithium prices to decline from 2H23” they still believe Allkem shares represent a great option for investors in the industry.

This is because of the company’s production growth potential and downstream opportunity, which it expects to support Allkem’s earnings when prices decline. It explained:

Allkem has one of the best production outlooks in our lithium coverage, with broad-based growth optionality, second only to Mineral Resources on an LCE basis when including downstream hydroxide production on an equity basis. This drives our forecast for the company’s equity LCE production growth of >4x by FY27E, supporting earnings rebounding to near current record levels despite the declining lithium price environment.

The post Broker says buy ASX 200 lithium share Allkem for 34% upside appeared first on The Motley Fool Australia.

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More reading

Motley Fool contributor James Mickleboro has positions in Allkem. 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.

from The Motley Fool Australia

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