A bargain way to play both sides of the automotive shift

As well as recycling group Renewi (RWI) – which has a big presence in the country – the European state is home to one of the world’s top midstream chemical processing and metal refining companies. The two areas are more closely related than you might think. When it comes to lithium, the market is so specialised and dependent on product consistency that it is more closely linked to chemicals than a copper or nickel supply chain. 

For UK investors, one way to envisage Umicore (BE:UMI) is to imagine if Johnson Matthey (JMAT) had committed to its shift to battery metals more than a decade ago. Umicore takes materials that are early in the supply chain, such as cobalt or lithium, and refines them into materials that can be used in lithium-ion batteries. A significant recycling division also feeds into the autocatalyst business. 

The JMAT comparison is not completely fair, as Umicore already provided the parts for the smaller lithium-ion batteries found in consumer electronics prior to its move into cars. The company is also “constantly” spending on expanding capacity, according to chief executive Mathias Miedreich, and has the advantage of having already started buying its own mine supply – far ahead of the carmakers, which are now investing at the mine level to try to guarantee supply. 

JMAT’s difficulties in developing and then ultimately abandoning its own battery metals unit highlight Umicore’s advantage. It gets to profit from both the continued demand for cars and trucks with engines, through its catalysts segment, and from electric vehicles (EVs) and hybrids. There is also a moonshot investment in solid-state batteries that could deliver if commercialised, although the chance of this providing a source of profits soon is low. 

The opportunity for investors lies in the in-between moment in which Umicore finds itself. Weakness in the automotive industry has pushed its shares down a third this year, although profits largely held up in the first half. And while adjusted cash profits were down, this was largely due to weaker precious metals prices and higher capital spending. 

 

 

Core activities

Umicore earnings are split across its three main business units: catalysis, energy and surface technologies (which includes the EV business) and recycling. Each has several divisions, organised by product or industry focus. Recycling is across different metals, while catalysis makes automotive catalysts, fuel cells and the conversion of metals chemicals. Europe is the centre of operations, employing over half of Umicore’s 11,000 workers, followed by Asia and North America.

In 2022, recycling contributed the highest adjusted Ebitda of the three, at €532mn (£457mn), but catalysis brought in a record cash profit of €419mn and energy €290mn. The businesses are all impacted by cyclical forces, largely related to auto sector demand and metals prices; for example, the catalysis unit’s bumper 2022 was thanks to both a resurgent light vehicle industry and higher platinum group metal (PGM) prices. Energy and surface also had a stellar 2022, thanks to strong cobalt, nickel and lithium margins.

 

 

The current year’s trading conditions have been tougher than 2022 so far, even though the company has guided for higher adjusted cash profits in both the catalysis and energy units. The fly in the ointment is recycling, which faces a fallback in PGM prices, and means prospective investors shouldn’t expect a repeat of interim numbers in the second half. While Umicore has benefited from the ramp-up in supply to carmakers, the impact of increasingly expensive auto loans and lower demand from cash-conscious consumers means pressures on the auto sector are likely to remain for the coming quarters.

Despite this, Umicore’s balance of business lines means management is optimistic. Citing returns from growth investments, Miedreich said in July that he expected Ebitda to “increase next year, significantly”.

 

 

Indeed, a degree of consistency is clear from Umicore’s historic returns and margins. These vary between business units, with recycling the highest at close to 50 per cent in adjusted Ebitda terms (stripping out the pass-through value of metals) and catalysis and energy at 23 per cent each. Getting those margins out of the battery space is tough, however. 

 

The EV market 

Although expectations of exponential increases in EV demand have moderated, the broader idea still applies. EV sales climbed 56 per cent in 2022 and hit 10 per cent of all vehicles sold worldwide, while the International Energy Agency forecasts a 35 per cent increase this year. For Umicore, this is likely to mean more demand for its battery-ready metals, given appetite for cathode materials was in line with battery metal demand last year.

The goal for the ‘rechargeable battery materials’ unit is to reach cash profit margins of 20 per cent by 2030, as outlined in a 2022 strategy update.  

Getting there will require a lot of cash. UBS forecasts that capital spending as a proportion of revenue will double this year, to 23 per cent, and get close to 25 per cent in 2024. EU rules on local sourcing of materials for EVs will help here, and the Nysa cathode plant in Poland, currently ramping up, will produce enough material for 20 gigawatt hours (GWh) of lithium-ion batteries by the end of the year. The UK overall has 2GWh of capacity, for context, according to the Society of Motor Manufacturers and Traders. While this means Umicore still relies on others to build battery cell factories (also known as gigafactories), the group has already inked supply agreements with battery and car manufacturers. One company backed by Mercedes and Stellantis will buy 13GWh of cathode-ready materials by next year. 

This doesn’t necessarily make for a clear path ahead. “The company’s cathode materials business faces structural challenges in improving returns,” says Jefferies analyst Chris Counihan, adding that the late 2020s could present risks around declining recycling and catalysis earnings not being replaced by the cathode business. For its part, Umicore’s stated ambition is to squeeze cash flow from combustion engines as long as possible, “to capture the market value peak ahead and to maximise business value through a continued focus on process efficiency and operational agility”. Its goal is €3bn of free cash flow between 2022 and 2030, or €333mn a year. 

 

The valuation case 

Such doubts help explain the share price decline this year. One function of this has been to bump up the prospective yield, even after an interim dividend of 25¢ a share fell short of a 32¢ forecast. Another has been to reduce the share price to 13 times forecast earnings, compared with a five-year average of 21. Beyond the bearishness around the car industry, other concerns are at play: thanks to the higher spending, free cash flow fell from €837mn in 2021 to €109mn last year and is forecast to turn negative in 2023. 

Then again, three factors make this an easy company to hold for the next decade. First, the continued cash generation from the catalysis business. This is where the comparison with JMAT is positive – they both know that business inside-out, and trucks will be running on diesel and petrol for years to come. Second, recycling will become more and more important to the EV supply chain. Miners are already looking at getting into the space, but are put off by the high start-up costs and low unit margins, creating a barrier to entry. Third, while selling into Europe’s EV market requires investment, it will pay out in the end.

Europe’s supply chain, aided by state support, must close if the bloc is to stop China becoming even more dominant. Umicore, as the incumbent with all the upstream supply deals, is well-placed to reap the benefits.

Company Details	Name	Mkt Cap	Price	52-Wk Hi/Lo
	Umicore (BE:UMI)	€5.73bn	€23.26	€36.7 / €23.1
Size/Debt	NAV per share	Net Cash / Debt(-)	Net Debt / Ebitda	Op Cash/ Ebitda
	€14.8	€-1.36bn	1.2 x	77%

Valuation	Fwd PE (+12mths)	Fwd DY (+12mths)	FCF yld (+12mths)	EV/EBIT
	13	3.5%	-4.9%	9.2
Quality/ Growth	EBIT Margin	ROCE	5yr Sales CAGR	5yr EPS CAGR
	2.6%	11.7%	16.3%	19.6%
Forecasts/ Momentum	Fwd EPS grth NTM	Fwd EPS grth STM	3-mth Mom	3-mth Fwd EPS change%
	-22%	4%	-15.5%	-6.1%

Year End 31 Dec	Sales (€bn)	Profit before tax (€mn)	EPS (c)	DPS (c)
2020	3.24	423	134	56.7
2021	3.96	879	277	82.8
2022	4.16	736	247	82.4
f’cst 2023	4.13	564	180	81.6
f’cst 2024	4.51	569	182	82.5
chg (%)	+9	+1	+1	+1
Source: FactSet, adjusted PTP and EPS figures
NTM = Next Twelve Months
STM = Second Twelve Months (i.e. one year from now)