Tuesday, Bernstein initiated coverage on POSCO (NYSE:PKX) Future M Co Ltd (003670:KS) stock, the battery material supplier, with an Underperform rating and a price target of KRW115,000. The new rating reflects the analyst's perspective on the company's growth prospects and current valuation.
POSCO Future M, a significant player outside China in the battery material sector, is recognized for manufacturing both cathodes and anodes. The company's major clients include LGES and Samsung SDI (KS:006400), and it is expanding its customer base to international automotive giants such as GM, Ford (NYSE:F), and Honda (NYSE:HMC).
The company's growth trajectory in the United States is particularly noteworthy, with plans to complete its first North American cathode plant by 2025.
The company's cathode capacity is projected to surge, with an anticipated increase from 105ktpa in 2023 to 395ktpa by 2028, marking a compound annual growth rate (CAGR) of 30%. To bolster its competitive edge, POSCO Future M is investing in the precursor business to achieve vertical integration with its cathode operations. It has also formed partnerships with Chinese industry leaders CNGR and Huayou Cobalt to fortify its cathode supply chain.
On the anode front, despite China's cost competitiveness, POSCO stands out as the largest anode supplier outside China. The firm's anode manufacturing capacity is expected to grow by a 13% CAGR from 83ktpa in 2023 to 150ktpa in 2028.
Revenue forecasts are optimistic, with projections of a 34% CAGR from KRW3.9 trillion to KRW7.0 trillion over the next two years (2024-26). The operating profit margin (OPM) is also expected to improve from 1% in 2024 to 5% in 2026.
However, funding for expansion poses a significant challenge, as the company's net debt to equity ratio stood at 85% at the end of 2023. The analyst's price target for POSCO Future M is derived from a sum-of-the-parts (SOTP) valuation, leading to a fair value of KRW115,000 per share. Currently, the company is trading at a forward price-to-earnings (P/E) ratio of 150 times, which the analyst suggests is a rich valuation given the uncertainties in near-term demand.
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