WA Kaolin gets 60 cents per share price target from Breakaway Research as it moves towards completing Wickepin Stage 1 construction

WA Kaolin Ltd (ASX:WAK) has received a 60 cents per share price target from Breakaway Research as it charges towards completing the first stage of the Wickepin Kaolin Project in Western Australia by August. The company has received a significant valuation upside from its current share price of 22 cents as it is on target and within budget with the ongoing stage-1 work program, designed to develop a kaolin processing plant with annual production capacity of more than 200,000 tonnes of kaolin by the end of 2021. The following is an extract from Breakaway Research’s research report: KEY POINTS WA Kaolin is on track to complete Wickepin Stage 1 construction in August 2021  with commissioning expected by  January  2022,  and commercial production in the March 2022 quarter, with additional stages to follow. The kaolin market is forecast to grow at over 4%pa over the next five years at least, creating the opportunity, and possibly the necessity, for WA Kaolin to grow into a significant global supplier. The company’s Resource base is sufficient to support production of over 1Mtpa, with timing of market penetration being the limiting factor. Drivers of share price appreciation are expected to be: Evidence of product acceptance by market through 2021 and 2022 Construction completed Q4 2021, commissioned by January 2022 Ramp up to full production during first half of 2022 Clarity on timing and funding of Stage 2 in 2023 We have looked at valuing WA Kaolin a number of ways, including NPV, PER, and peer comparison, and with each measure, we come up with a valuation range of between A$0.30/sh and over A$1/sh. The valuations are sensitive to a range of factors, but we believe the factor most relevant to driving the perception of value is the rate of sales volume growth (ie announced contracts), and the implications for future expansion. Our price target of A$0.60/sh is based on where the share price will be in 12 months time, that is by the middle of 2022, with the Stage 1 plant operating, and the market getting a sense of how quickly the company will grow. Both NPV and PER valuations will be determined by perception of the timing of Stage 2. Hence, Breakaway Research has a BUY recommendation on WA Kaolin with a price target of A$0.60/share. Company Overview & Investment Case Strategy of organic growth from cash flow WA Kaolin intends to invest A$18.07M in order to move and expand its existing K99 plant from Kwinana to the mine site at Wickepin and to ramp-up K99 production capacity to Stage 1 capacity of 200,000 tonnes per annum within 12 months, followed by a similar sized Stage 2 costing A$13.45M. These two stages use a low cost dry processing route. On completion of Stage 2, the additional free cash flow may allow investment in construction of a wet process plant to produce finished product suitable for premium paper and packaging markets at 250,000 tonnes per annum, with capability to double that output to a total of 500,000tpa wet processed products and 400,000tpa dry processed products. The strong reserve base provides the company with a strong low risk organic growth platform. At a waste to ore ratio of less than 1:1, serviced by public infrastructure such as rail, and road, and using similar, or cheaper,  processing technology compared to its international peers, WA Kaolin is likely to be cost competitive in the long term, able to grow market share, and therefore grow faster than the global kaolin demand growth rate. The diversity of industries that consume kaolin mean that kaolin demand will grow at least as fast as, if not faster than, world growth. Valuation On NPV, worth A$0.47/sh to over A$2.00/sh depending on how many stages of growth are priced in. On Earnings in FY23 and FY24, at market average Price Earnings Ratio, worth A$0.21/sh to A$0.81/sh. On Resources compared to peers, A$0.44/sh to over A$2.00/sh. Trading range since listing A$0.16/sh to A$0.323/sh FIGURE 1 VALUATION SUMMARY (A$/SH) Project Value and Peer Comparison Net Present Valuation of operations generates between A$0.47/sh to >A$2.00/sh TABLE 3 NET PRESENT VALUE ASSUMING STAGE 2 EXPANSION TO 400KTPA OF DRY PROCESS PRODUCT IS A$1.08/SH On earnings at the average Australian market PER, WAK is worth A$0.21/sh-A$0.81/sh We argue that WA Kaolin is likely to be a multi-year growth stock and should be rated at a PER higher than that of the market. Investors may require it to build up a track record to achieve an above market rating, so in the meantime, reported earnings will be important and Table 4 shows valuations based on earnings by year for Stage 1 only and for Stages 1 and 2 combined, using the current ASX average PER of 16x. Our Stage 1 only scenario includes a slower ramp up, with 150,000 tonnes of sales in FY23, compared to 192,000 tonnes for the same year in the Stages 1+2 base case (our base case for this report). We believe the market will be focused on earnings and guidance, as well as any marketing or contracting announcements, to form a view as to the pace of the volume ramp up. With that focus, we would be surprised to see the WA Kaolin share price outside of the valuation range set by earnings.