Company Overview: Novonix Limited (ASX: NVX) supplies high-performance battery materials for the lithium-ion battery industry globally. The company has operations in the US, Canada, and Australia with customers in more than 14 countries. It provides technology for battery testing and supplies synthetic graphite anode material for electric vehicles and energy storage applications. The company conducts its operations primarily through Novonix Battery Testing Services and PUREgraphite, both these companies were acquired in 2017.

NVX Details

Strong Growth Plans in Anode and Cathode Battery Materials: NVX is currently developing high-grade anode materials that give long-battery life suitable for electric vehicles (EV). It is currently in transition to Generation 2 furnace technology through a technology tie-up with US-based Harper International Corporation. NVX is set to begin delivery of large volumes of synthetic anode materials to Samsung by H2 FY21. NVX is on-track in progressing for Sanyo with sample testing for anode materials. The company plans to ramp-up capacity to 2,000 tonnes per annum for PUREgraphite anode with Generation 2 systems under installation. Novonix plans to reach a production capacity of 150,000 tonnes per annum by 2030 which would serve ~2.7 million electric vehicles.

Figure 1. Capacity Plans for PUREgraphite Anode:

Source: Company Reports

NVX’s current grade at 350-360 mAh/g remains the highest for anode materials and it aims to bring the dollar cost per kWh. The company’s anode supports energy storage systems and electric vehicles as its high-tech manufacturing technology gives a very long cycle life for batteries. NVX had partnered with Emera for residential battery storage technology. NVX is also progressing on cathode materials using DPMG technology – it had filed a patent in 2019 and 2020. NVX is conducting a pilot study for single crystal and polycrystal cathodes.

Novonix is expecting the market for anode and cathode battery materials to surge from the US $ 50 billion at present to the US $100 billion in the next 5-10 years. On the EV market, Ford is ready to go all-electric in Europe by 2030 and General Motors by 2035 as the regulatory mandates tighten. The passenger EV sales is expected to exceed ~25 million by 2030. This will accentuate global lithium-ion cell capacity to reach 3,153 Gwh by 2030, according to Novonix. NVX is also evaluating long-life advanced electrolytes systems to capture the market. It believes that new technology and systems will eventually bring down the battery costs going forward.

Figure 2. Pipeline Plans:

Source: Company Reports

Historical Financial Trend:

NVX is yet to reach scalability as it currently derives revenue from the sale of cell testing equipment and providing battery testing R&D and consulting services to customers. It has plans to ramp-up anode materials with supply contracts secured from Samsung and Sanyo with deliveries expecting to commence by early 2021. The company’s battery technology solutions received the US $5.57 million grant from the US Department of Energy as well forged NVX forged a 5-year research partnership with Dalhousie University to foray into silicon, lithium metals, or solid-state and beyond lithium-ion research studies. NVX’s ambitious plans are well-capitalized. Recently, Novonix completed $115 million fundraisings from institutional investors which had seen the issue oversubscribed.

Figure 3. Two-Year Revenue Generation Trend by Sources: 

Source: Company Reports

The company’s cell testing equipment has been widely used by leading battery makers and researchers and equipment manufacturers such as CATL, Panasonic, LG Chemical, Samsung SDI, and various others. It had acquired the business in 2017 and ramped-up significantly through investments from and a partnership with Dalhousie University. The company recently appointed a researcher at Dalhousie University, Prof. Jeff Dahn as its Chief Scientific Officer. It had developed Dry Particle Micro Granulation (DPMG) and Single Crystal Cathode technology all in-house that helped to clock robust revenue growth in FY20. NVX continues to incur losses as it is yet to reach commercialization of its battery materials. The company had a strong equity base of $66.53 million as of June 2020 to support the losses and it had a cash balance of $38.81 million to cover the operating requirements.

Figure 4. FY20 Key Financial Highlights:

Source: Company Reports

H1 FY21 Performance:

NVX continues to achieve strong traction in its battery solutions business with services in battery prototyping, materials evaluation, and cell vendor qualification testing projects. The company is on track to expand production capacity for synthetic graphite materials. It had expanded build-out and additional teams supporting expansion in the anode materials business. The company’s total costs of US $11.50 million for synthetic graphite were funded partially by the US government to the tune of US $5.57 million. Total equity stood at $58.57 million as of December 2020 and cash balance at $25.28 million. Post the half-year period closing, NVX received equity funding of $115 million which will support anode materials expansion plans to the extent of $95 million.

Figure 5. H1 FY21 Financial Snapshot:

Source: Company Reports

Top 10 Shareholders: The top 10 shareholders together form ~41.83% of the total shareholding. St Baker Energy Holdings Pty. Ltd. and State Baynton (Gregory Alexander John) are holding a maximum stake in the company at 15.35% and 7.66%, respectively.

Key Metrics: NVX witnessed robust revenues since 2017 driven by rigorous R&D efforts in cell equipment and technology. The company is expected to stabilize as it ramp-up its anode materials and starts delivering to Samsung and Sanyo. Its liquidity profiles appears strong driven by equity funding base and ability to raise funds.

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Outlook: The management intends to develop long-life cathode and advanced electrolyte materials which will support rapidly growing battery storage demand and transition to EV. It plans to achieve scalability through next-gen furnace technology through partnership with Harper International Corporation. Deliveries to Samsung for anode materials are set to commence in H2 FY21. Funding from institutional investors will be used to ramp-up the production to reach a capacity of 2,000 tonnes. Continued R&D from a new collaboration with Dalhousie University will support its battery technology solutions business. The company expects to create more intellectual property in the advanced silicon materials and cathode materials.

Key Risks: NVX has a short operating history (operations commenced in 2017) and may not be able to turn profitable in the near-term. The company’s success is largely dependent on the development of new technology and anode products which may not materialize given the dynamic and challenging environment. It is highly reliant upon Samsung for anode ramp-up and deliveries. Any delay in project execution may widen the losses. The battery materials market is highly competitive and dependent on very few suppliers which may put pressure on pricing. The EV and renewables market is highly regulated, any changes in policies may impact the market for battery materials.

Valuation Methodology: Price to Sales Multiple Based Relative Valuation (Illustrative)

Price to Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: NVX has delivered 3-month and 6-month positive returns of ~143.56% and ~44.71%, respectively. The stock is trading slightly above the average of the 52-week high price of $4.230 and 52-week low price of $0.129. On the technical front, the stock has a support level of ~ AU$2.327 and a resistance level of ~AU$2.765. We have valued the stock using Price to Sales multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a slight discount as compared to its peer median Price/Sales (NTM Trading multiple) considering the sequential operating losses, limited history and nil product sale till date, although the company has strong growth plans and pipeline. For this purpose, we have taken peers like Codan Ltd. (ASX: CDA), Kopin Corporation (NASDAQ: KOPN), Catapult Group International Ltd. (ASX: CAT), to name a few. Considering the expansion plans for anode materials and cathode and battery technology, strong equity base and cash balance, fundraising ability, we give a “Buy” recommendation on the stock at the current market price of AU$2.460, down 1.601% on March 23, 2021.

NVX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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