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Altech Chemicals has key catalyst on the horizon as it trades at steep discount to broker valuations

High purity alumina (HPA) is a high-value, robust margin and heavily sought-after product.
HPA is used in LED lighting
DJ Carmichael's modelling points to maiden revenues of about $100 million in fiscal 2020

Altech Chemicals Ltd (ASX:ATC) made significant progress towards becoming one of the world's leading suppliers of 99.99% high purity alumina (HPA) in the last 12 months.

HPA is a high-value, robust margin and heavily sought-after product as it is the critical ingredient required for the production of synthetic sapphire.

There is no substitution for HPA in the manufacture of synthetic sapphire, which in turn is used in the manufacture of mass-market products.

Is there a significant re-rating in the wind?

There are multiple share price catalysts on the horizon which could see Altech trade more in line with broker valuations in 2018.

It is worth noting at this stage that DJ Carmichael’s valuation of 37 cents per share implies potential upside of about 140% to Tuesday’s closing price of 15.5 cents.

Iggy Tan, managing director, pointed to some of the upcoming developments at Altech during an interview with Proactive Investors.

He said, “The major catalyst for the company is when we finalise the balance of funds for the project, which is expected to occur in mid-2018. 

Highlighting the already strong financial support the company has received, Tan said, “The project is backed by world-class companies like Mitsubishi for the offtake, KFW IPEX for debt finance and SMS Group as EPC (plant construction) partner. 

"From a standing start three years ago, the team has advanced this project to close of debt funding in such a short time."

Technology drives demand for synthetic sapphire

Synthetic sapphire is used in the manufacture of substrates for LED lights, semiconductor wafers used in electronics, and scratch-resistant sapphire glass.

There are numerous applications for sapphire glass including wristwatch faces, optical windows and smartphone components.

Looking specifically at LED lights, Navigant Research is forecasting demand to increase to more than 4.1 billion by 2024, equating to growth of about 400% in less than 10 years.

Exponential growth in HPA demand

With increased usage of LEDs and a myriad of other applications on the horizon, Navigant forecasts demand for HPA to increase to about 87,000 tonnes per annum by 2024.

Annual global HPA demand is about 25,000 tonnes, but it is growing at a compound annual growth rate of 16.7%, primarily driven to date by the worldwide adoption of LEDs.

However, this rate of growth could accelerate as applications in the lithium-ion battery industry materialise.

Patents provide path to protection

Altech lodged a new provisional patent application with the Australian Patent Office in February.

READ: Altech Chemicals patent application further protects high purity alumina technology

This incorporates the finished product HPA technology developed for its HPA project, expanding on a previous patent lodged in October 2014.

An impression of the proposed Malaysian HPA plant

The new patent application incorporates various refinements made to the company’s HPA processing route during project due diligence.

New product taps into lithium-ion battery industry

The expanded patent incorporates the company’s latest invention, the flexible finished product line.

This is capable of producing HPA product for the synthetic sapphire industry and the lithium-ion battery industry (powder at sub-micron particle size).

Altech cited research indicating that third-generation battery safety will make current battery technology obsolete.

The company’s HPA product can be used as a lithium-ion battery separator that is situated between the cathode sheet and anode sheet of a traditional lithium-ion battery.

Use of similar technology would represent patent breach

As an emerging player in the HPA market, Altech’s competitive position and the strength of its technology has recently been enhanced.

The company undertook extensive due diligence in terms of confirming its distribution markets and the protection of its intellectual property.

The search confirmed Altech’s view that its intellectual property for producing HPA from kaolin/aluminous material using its hydrochloric acid-based processing technology is unique.

As such, any other party that employs a similar process to produce HPA would most likely be in breach of Altech’s patent applications.

Financing substantially de-risks project

Altech negotiated a total debt package of US$190 million in early February, dispensing with one of the more significant hurdles the company faced in bringing its project to market.

The financing consists of a US$170 million debt package negotiated with the German export credit agency (ECA), with the balance of US$20 million at normal commercial terms.

The ECA covered loan is for an extended period with highly attractive terms, providing Altech with ample time to build the plant and bring it into production.

READ: Altech Chemicals finalises US$190 million finance package for alumina plant

Increased clarity surrounding funding provided positive investor sentiment with the company’s shares increasing from about 15 cents to 17.5 cents in the ensuing week.

While subsequent volatility in broader global equity markets has eroded some of these gains, there are catalysts on the horizon that suggest this retracement could present a buying opportunity.

Broker updates valuation following financing

Paul Adams, analyst at DJ Carmichael, upgraded his valuation by 15.6% to 37 cents following the financing agreement.

This implies upside of about 150% to the company’s current trading range.

He believes there is the prospect of a part equity sell down in terms of achieving the equity component of project financing.

Based on his assumptions regarding this scenario, his valuation would move to 42 cents.

Maiden revenues in 2020

Adams’ modelling points to maiden revenues of about $100 million being generated in fiscal 2020, increasing to $180 million in 2022.

At this point, Adams estimates that the company will be generating underlying earnings of about $125 million.

With the prospect of minimal taxation during this period, these numbers appear particularly impressive.

Tax benefits

The HPA project’s financial fundamentals would be boosted by Altech being attributed ‘Pioneer Status’ by the Malaysian government.

Tan views this prospect as a key development, saying, “The approval of pioneer status for the project and the associated tax incentives will be another important catalyst.” 

The possibility of this coming to fruition increased in February when the government received a manufacturing licence approval for its 4500 tonnes per annum plant.

READ: Altech Chemicals has manufacturing licence approved for HPA plant in Malaysia

Should this be formalised, the company will benefit from income tax exemption relating to 100% of the company’s statutory income for a period of five years from commencement of commercial production.

Any accumulated losses and unabsorbed capital allowances during this period can be carried forward and deducted from post-Pioneer Status period income.

Should Altech be awarded Pioneer Status, a large proportion of the underlying earnings projected by DJ Carmichael would drop to the bottom line.

Given its earnings sensitivity, such a development could be a share price catalyst.

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