With its impressive showing, Allogene (ALLO 23.52, +5.52, +30.67%) showed that at least
some healthcare-related IPOs are immune to this sell-off and market
volatility. Unfortunately for Livent (LTHM 16.74, -0.26, -1.56%), the same can't be said for the
electric vehicle battery market as its IPO priced below the expected price
range. However, its pricing might be considered decent since it didn't have to
cut its deal size and it still priced near the original expectations despite
the magnitude of yesterday’s sell-off.
Often, when the stock market experiences turbulence like this, the impact on the IPO market can be quite severe. Since IPOs are an inherently sensitive, high-risk asset class,, when investors are in a flight to safety mode, interest in IPOs can dry up entirely. Consequently, IPOs can have their deal size and/or price range cut drastically or even suspended or cancelled altogether.
Livent priced its 20.0 mln share IPO at $17 versus the $18-$20 price range, generating $340 mln in total proceeds. Underwriters behind the deal include Goldman Sachs, BofA Merrill Lynch, and Credit Suisse, which helped its cause. It is also a NYSE listed stock, giving the name a little more prominence.
LTHM is a fully-integrated lithium company developing battery-grade lithium hydroxide, butyllithium, and high purity lithium metal. Its primary focus is to supply high-performance lithium compounds for the electric vehicle battery market, while also maintaining its leadership position as a producer of butyllithium and lithium metal. The company believes that the strong expected growth in electric vehicles, along with its leadership position and low-cost structure, will continue to fuel its growth. LTHM also is diversified a bit as its products are also used in pharmaceutical products, as well as in aerospace applications.
The company believes it has a few significant competitive advantages. For example it operates one of the lowest cost lithium deposits in the world. Specifically, it has been extracting lithium brine at its operations at the Salar del Hombre Muerto in Argentina for more than 20 years, and has been producing lithium compounds for over 60 years. LTHM's can expand its operations in Argentina so it can increase lithium carbonate and lithium chloride production to meet increasing demand. It also has the operational flexibility to procure lithium carbonate from third party suppliers as raw materials. This strategy allows it to manage its production requirements and raw material cost, creating opportunities to optimize profitability.
In recent years, the company has been ramping up its production in order to meet rising demand. Specifically, in May 2016, LTHM announced plans to increase its lithium hydroxide capacity to 30 kMT by the end of 2019. To support its lithium hydroxide expansion the company plans to expand lithium carbonate production in Argentina from 15 kMT in 2017 to at least 60 kMT by the end of 2025, in four separate stages. These expansions should ensure the company has the capacity to meet customer demands globally, as they expand their own production networks around the globe.
As noted above, LTHM's primary focus will be on the electric vehicle market. EV sales are expected to reach 60.2 mln units in 2040, representing a penetration rate of 55% of all vehicles sold, according to Bloomberg. Automotive original equipment manufacturers have announced plans to introduce longer-range EV models using higher energy density batteries, and are increasingly doing so by moving to high nickel content cathode materials. This shift will increasingly require battery-grade lithium hydroxide in the production of cathode materials.
Taking a look at its financials, for the six months ended June 30, 2018, revenue jumped by 51% to $210.7 mln. This was due to both higher volumes of lithium hydroxide in China driven by the increased production capacity as well as increased pricing. On a regional basis, sales in North America increased 6%, sales in Asia increased 80% and sales in Europe, Middle East, and Africa (EMEA) increased by 42%, while sales in Latin America decreased by 9%.
Gross margin as a percent of revenue was approximately 50% versus 41% in the six months ended June 30, 2017. The increase in gross margin was primarily driven by prices, product mix and improved operating leverage.
As a result of the above, net income soared by 154% to $70.2 mln, and Adjusted EBITDA rocketed to $94.5 mln from $45.7 mln.
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