2 ASX large-caps Macquarie tips will outperform

Yesterday saw quarterly earnings announcements from two distinct ASX large-caps – battery metals producer Arcadium Lithium and commercial property company Goodman Group. On the back of these, Macquarie equity analysts reiterated their OUTPERFORM ratings for both.

In the following, we look at what the research team made of the results and their investment theses for the two companies.

Goodman Group (ASX: GMG)

Shares in Goodman Group hit a 52-week high of $34.22 yesterday on the back of yesterday’s quarterly earnings result.

The commercial property company, with a large focus on industrial buildings, has benefited from the increased emphasis on prime logistics assets – particularly as institutional investors have been rotating out of office assets since work-from-home rose during COVID.

Goodman’s upgraded EPS guidance was a key takeaway, management lifting its guidance to 13% from 11% for FY24. This was driven by elevated performance fees and strong management income, which came in higher than previously flagged.

Macquarie analysts are even more upbeat, tipping 14% growth in EPS for FY24.

“The group has upgraded at the 3Q update over the past 3 years (3Q24 inclusive) and has beaten guidance at the FY result over the past 6 years,” Macquarie said.

A surge in data centre demand

GMG has also been increasing its focus on data centres, on the back of the AI-driven surge in demand for computing power.

During the earnings update, management said 40% of its commercial building projects were tied to data centres, up from 37% at the end of December. This latest figure is double the 20% average of new project starts in the prior five years.

Though building commencements in this segment were softer than expected in the March quarter, Macquarie said: “We believe that given the higher expected returns from data centre projects (we previously estimated development margins of ~60%+), a reduction in the production rate and any q-q volatility in commencements is unlikely to affect the growth prospect for development earnings as timing of payments/profits will occur throughout production.”

Macquarie also emphasised the value it sees in the share price at current levels – despite its earnings multiple re-rating to 29 times from 23 times in the calendar year so far.

“Our target price of $36.37 implies a FY25 multiple of 30 times, which compares to the average forward multiple of 38 times of its comparable peer group (see fig-3) which has a similar earnings growth trajectory to GMG, on average (we forecast a 3-year OEPS CAGR of +12.5% vs peer group at +14.0%).”

• Rating: OUTPERFORM

• Target price: $36.37

GMG 12-month share price (Source: Market Index)

Key risks

On the upside, Macquarie analysts note their thesis could undershoot if Macquarie’s management fees and/or margins on data centre development  for the remainder of FY24 are higher than expected.

The only downside risk flagged was the potential for weaker-than-expected demand. This would reduce new building commencements and portfolio performance.

Arcadium Lithium (ASX: LTM)

Battery metals producer Arcadium Lithium is another firm Macquarie is tipping will push higher from here. That’s despite a mixed 1Q calendar 2024 result that saw revenue in line with consensus (+1%) but missed by -6% on EBITDA and net profit (-53%).

(In case you missed it, Arcadium is the combined entity resulting from the merger of Allkem and US competitor Livent – a $14 billion deal that completed in January. Allkem itself was formed from a merger of two ASX incumbents, Orocobre and Galaxy Resources, in April 2021.)

What Macquarie liked...

LTM’s realised price for lithium hydroxide (LiOH) was better than average during the quarter. Macquarie analysts noted LTM’s average price of US$20.5 per kilogram was between 70-85% above the China LCE 99.5% and LiOH prices of around $12/kg and $11/kg, respectively.

Analysts also called out the skew of one-off costs into the first quarter – with US$84 million of integration costs and write-downs. But management indicated this figure represented up to 90% of the total integration costs for the year.

…And didn’t like

High cash burn: LTM management reported US$111 million of net debt for the March quarter – versus the consensus expectation of net cash. “The high cash-burn rate reflected one-off charges as part of business integration and tax payments,” Macquarie said.

What else Macquarie is watching

“Portfolio optimisation” of the mine assets controlled by LTM, including the Mt Cattlin mine, which is approaching end-of-life.

Limited cash flow clarity, analysts noting the contrast of the firm’s US$365 million of net investing cash inflow and its US$300 million capex. Indicating this leaves around $600 million of other movements, “Improved visibility on investing cash flows may provide insight to LTM's net debt position and capital program in the medium term.

Macquarie’s investment thesis

While noting the effective one-off costs, the analysts noted management reiterated EBITDA guidance of between US$420 million and $1 billion. Note, this range is huge because their forecasts for the lithium price are so wide in and of itself (between US$15K and US$25K).

Macquarie also emphasised the earlier point about the fixed prices and price floors for its contracts for LiOH. These represent about 25% of LTM’s total sales in CY24 and two-thirds of its annual LiOH volume.

• Rating: OUTPERFORM

• Price target: A$9.40 – implying downside of 6%.

LTM 6-month share price (Source: Market Index) 

LTM’s share price closed at $7.12 on Wednesday 8 May.