ELKEM Silicone outlook improving We reiterate our BUY and NOK40 target price as: 1) silicone prices in China are now above our 2019e estimate; 2) medium-term supply overhang is abating due to projects being scaled back; and 3) significant demand potential for electric vehicles longer-term on sharp growth and as silicone content is c4x higher. We forecast Q1 EBITDA of NOK815m, slightly below consensus, but we remain above for 2019e).
Silicones outlook improving. Silicone prices are currently at RMB21,000/mt, well above our 2019e of cRMB20,000/mt. We believe the healthy market situation is likely to continue as Chinese stimuli are likely to have a further positive effect on demand in H2 2019 and supply growth is limited. We hosted a presentation with the CFO last week, and Elkem now sees 2019–2021 global capacity growth of c300kmt (zero in 2019), broadly in line with its expected annual demand growth and well below some estimates of up to 1mmt of new capacity. Our supply forecasts suggest a total of 380kmt of firm capacity coming on stream in the next four years. EV contains 4x more silicon than conventional car. Another key takeaway from the CFO presentation was the solid growth outlook for silicones into EV (electric vehicle) s. An EV contains c4x more silicone than a conventional car and Elkem is already a key supplier to Tesla. According to BNEF, EVs should have a 19% CAGR from 2018– 2040 and become 33% of the global vehicle fleet.
We forecast Q1 EBITDA of NOK815m. We have slightly lowered our Q1 forecasts on the back of somewhat lower than expected contribution from Silicon Materials, as prices have been a touch lower than we forecast. We estimate Q1 EBITDA of NOK815m (consensus: NOK837m). The Q1 results are due at 07:00 CET on 30 April.
BUY and NOK40 target price reiterated, as we consider the current valuation at 4.7x EBITDA and 7.5x 2019e earnings attractive. Our SOTP-derived target price is based on a 15% through-the-cycle margin for silicones at 5.5x EBITDA. We estimate a 6.5% –8.1% DPS yield for Elkem in 2019–2021e