July 31st, 2023 | 09:20 CEST
Bayer, Defense Metals, Alibaba - Stocks with doubling potential
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"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
Bayer - A doubling candidate?
Bayer lowered its fiscal year outlook on July 24. Instead of EUR 51 billion to EUR 52 billion, the Group is only targeting between EUR 48.5 billion and EUR 49.5 billion. The Company also lowered EBITDA from the planned EUR 12.5 billion to EUR 13 billion to EUR 11.3 billion to EUR 11.8 billion. Free cash flow was adjusted from EUR 3 billion to around EUR 0. The exact figures for Q2 will not be announced until August 8, but it has already been reported that it expects sales of around EUR 11 billion and EBITDA of EUR 2.5 billion. The main reason is the poor sales figures, especially for glyphosate products.
However, if you look at the Company from a long-term perspective, Bayer is well-positioned. At the Crop Science Innovation Summit, the Company presented a strategy to tap into adjacent markets of conventional agriculture. This would increase market potential from EUR 100 billion to EUR 200 billion. Since new CEO Bill Anderson took the helm, rumors of a spin-off of the Crop Science division have also emerged. This would significantly raise the value of the Pharmaceuticals division, where some experts see individual products with as much potential as the current market capitalization of the entire Group.
A new research strategy is also being pursued in the pharmaceuticals sector to bring innovations to market more quickly. In the next few years, the legal disputes surrounding glyphosate in the US should also end, and this would finally remove the constant sword of Damocles hanging over the Group. The share reacted surprisingly positively to the forecast reduction and exited Xetra trading on Friday at EUR 52.40. The majority of analysts also responded positively and, despite the bad news, issued 6 buy recommendations with price targets between EUR 65 and EUR 92. Only 2 analysts advised to hold.
Defense Metals - Independence from China
Since the outbreak of the Ukraine conflict, many Western countries have become aware that they should not become overly dependent on individual partners. A critical raw material to which this applies is rare earths, which are indispensable for the production of many key technologies. The wide range of applications is creating growing demand. If China were to restrict its exports, it would have significant implications for the world. The Canadian company Defense Metals is actively working on the Wicheeda rare earths project in British Columbia to reduce this dependency. The deposit covers 4,244 hectares and has a high concentration of rare earths, making it very promising.
The preliminary economic assessment indicated an after-tax net present value of USD 397 million and an after-tax internal rate of return of 18%. The pilot plant has already been completed. The required hydrometallurgical Phase II pilot plant tests were successfully completed on June 6. More than 90% of praseodymium (Pr) and neodymium (Nd) were recovered from the acidic baked calcine. With the rare earths recovered from the facility, Defense Metals has the opportunity to provide samples to potential customers and establish business relationships. At the same time, the Company has begun preparing a prefeasibility study (PFS), which is expected to be completed in H1 2024.
Once completed, Defense Metals could cover about 10% of global production and be able to supply about 25,000 tons of rare earth oxides (REO) per year. This would be a significant 1st step towards independence from China, especially since the Company pays close attention to ESG standards. The stock came under pressure with the last private placement, in which the Company raised CAD 12.5 million and is currently trading at CAD 0.23. This gives the Company a market capitalization of CAD 58.8 million, which compares favorably to many of its peers. Long-term investors could add a potential doubler to their portfolio with this promising project.
Alibaba - Will the spin-offs bring the breakthrough?
At Alibaba, the upswing of the tech giants has passed by. This is mainly due to regulatory risks related to tensions between the US and China. However, there are increasing signs that the tide could turn. The Chinese group has made a change in its top management. The transition to Eddie Wu and the restructuring plans, such as the spin-off of individual businesses to reduce the conglomerate discount, should benefit shareholders.
The Company is currently exploring options for combining its video businesses, including streaming platforms and a possible IPO. They could potentially come back into consideration for Ant Group as well. The CYN 7.12 billion fine imposed by China's central bank could signal the end of a protracted regulatory dispute. These restructurings are expected to boost growth and strengthen the group in various areas, such as cloud computing and logistics.
It is also doing a lot of other things for shareholders. Last quarter, Alibaba reported strong growth in several business categories and a significant increase in profitability due to cost-cutting initiatives. The Company generated significant free cash flow and engaged in share repurchases. Last Friday, the stock broke the psychologically important USD 100 barrier on the New York Stock Exchange, closing at USD 100.55. If the hurdle at USD 105.05 is cleared, prices of over USD 120 are quickly possible. As a result of the potential spin-offs, shareholders could soon see even higher profits.
In order to find stocks that have the potential to double, one needs to consider a longer time horizon. Current negative news can weaken a share price in the short term, but as long as the long-term forecasts are positive, you can accumulate the stocks. Bayer is going through a difficult phase but seems well equipped with new strategiesfor the future. A spin-off of Crop Science would boost the stock significantly. Defense Metals offers an opportunity with its rare earths to reduce dependence on China. The critical raw material is becoming increasingly important for new technologies. Alibaba is doing a lot for its shareholders, and without the geopolitical tensions and the Chinese government, the stock would already be much higher today. China is growing, and so will Alibaba.
Conflict of interest
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