Wesfarmers (WES) and Kidman Resources (KDR) have entered into a formal agreement whereby WES will acquire 100 per cent of KDR at A$1.90 per share. The offer price is unchanged from the May 2 announcement and values KDR at A$776 million. The formal agreement follows three weeks of exclusive due diligence by WES, confirming its view on the opportunity.
If successful, the deal will give WES exposure to increasing global demand for electric vehicles with the production of lithium hydroxide being a key part of the value chain. The transaction remains subject to various conditions including KDR shareholder approval and an independent expert report concluding the deal is in the best interest of KDR shareholders. If satisfied, the deal is expected to close in September.
Why is Wesfarmers interested in lithium?
According to Morningstar forecasts, (Harrell, D Paying a price for popularity, Morningstar Research, February 2019), electric vehicle and hybrid vehicle sales will reach 20pc of all new vehicle sales by 2028. As a reference point current electric vehicle sales is 2pc of new car sales in the United States. Over two million electric vehicles were sold in 2018, up from just a few thousand in 2010, and there is no sign of slowing down. Bloomberg expects electric vehicles sales to rise to 10 million in 2025, 28 million in 2020, and 56 million by 2040 (McKerracher, Colin Electric Vehicle Outlook Bloomberg Research, 2019, https://about.bnef.com/electric-vehicle-outlook/).
Despite the rapid growth in sales, there are over a billion vehicles on the road currently, and electric vehicles are still less than 0.5pc of the global vehicle fleet. Changing towards electric vehicles will take time.
Emissions regulations are getting a lot tighter world wide, particularly in major cities. China is one country that has taken an aggressive policy stance at both the national and regional levels towards the use of electric vehicles. Bloomberg research suggests that China will account for 48pc of the passenger electric vehicle sales market in 2025.
According to Amara's law, we tend to over estimate the effect of technology change in the short run, and under estimate the effect in the long run. As always long term themes such as electric vehicles will go through shorter term peaks and troughs in confidence.
We have taken a conservative stance on lithium respecting that the market for this commodity is still in its infancy. However with a large blue chip Australian business taking interest in this market, this has gained our attention. The investment for Wesfarmers in Kidman is relatively small so we expect it to be easily funded by WES's existing balance sheet with the potential for further similar acquisitions over the next 12 months. We maintain our hold rating on WES with the stock now trading on 20.6x FY20F PE and 4.2pc yield.
- Boh Burima Financial Adviser | Authorised Representative: 000341081. Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410