Goldman Sachs names 2 high conviction ASX stocks with over 35% upside for 2025

Goldman Sachs has revamped its list of highest conviction Asia Pacific stocks going into 2025 - and there are two new S&P/ASX 200 names in Iluka Resources (ASX: ILU) and Worley (ASX: WOR).

The investment bank's APAC Conviction List has highlighted several solid growth stories over the past couple of months. In October 2024, the list featured Life360 while removing Qantas and Lynas Rare Earths – Both of which experienced a solid performance in the year-to-October.

The Conviction List has a buy rating on both stocks, with a $7.70 target for Iluka and $18 for Worley.

Iluka Resources: A compelling cash flow story

Iluka Resources leads global zircon production with a 30% market share, operating in an industry where the top 3 producers control 65% of output. Beyond zircon, which supplies ceramics and chemical industries, Iluka is a major producer of high-grade TiO2 feedstock for paint manufacturing, holding a 20% market share. The company is also expanding into rare earths, constructing an Australian refinery to supply Western manufacturers with both light (Nd & Pr) and heavy (Tb & Dy) rare earths — critical components for magnets used in electric vehicles, wind turbines, robotics, and electronics.

Goldman Sachs analyst Paul Young believes the zircon market is one of the best structural supply-side stories in commodities due to "industry grade decline and lack of new investment in new mine supply." He sees the company as a major beneficiary given its world-leading market share of 30% and forecasts the company's EBITDA to double by 2028.

The Australian Government recently approved $400 million in additional funding for Iluka's Eneabba Rare Earth refinery in Western Australia, bringing total government non-recourse funding to $1.65 billion. The refinery is now fully funded and construction of the 3-4ktpa (NdPr) facility will begin in the first quarter of 2025, representing a significant milestone for the company.

The development of Eneabba will be a strategic and highly valuable Western World critical mineral asset and only the fifth rare earth refinery outside of China, according to Young.

From a valuation perspective, he believes the stock is undervalued for several reasons.

• Iluka is trading at 0.55x NAV or $9.34 per share
• The stock is pricing in almost no value to the rare earths refinery and Wimmera rare earths project
• The stock is trading at approximately 5x EBITDA (next twelve months) vs. key rare earth peers trading at 16x and mineral sands players at 6x
• Iluka is trading on a free cashflow yield of 14% in 2025-26 without the rare earths refinery capex and is in a net cash position
• At the current share price, it makes sense for Iluka to announce a share buyback, funded by free cashflow from mineral sands

Paul says the current drop in sales volumes and prices will be relatively short-lived compared to prior cycles due to the supply backdrop.

Worley: Improved backlog momentum

Worley provides global engineering and professional services, specialising in project and asset support including engineering, procurement, and construction management. Their revenue mix spans energy (48%), chemicals (30%), and resources (22%). The company is positioned to both facilitate the transition to sustainable energy and capitalise on conventional energy investments, particularly during periods of heightened focus on energy security and supply chain regionalisation.

Worley shares have struggled over the past twelve months, down 18% (vs. S&P/ASX 200 +12%). Goldman Sachs analyst Niraj Shah says the stock has lagged due to reduced customer investment momentum from economic and geopolitical uncertainty but expects this to pick up over FY25-26. He expects Worley to continue demonstrating operating leverage (despite cyclically slower revenue growth in FY25e) alongside improved earnings quality, cash generation and balance sheet metrics.

Cyclically improved industrial activity and the initial contribution from Worley's CP2 should see revenues return to double-digit growth by FY26, where Niraj forecasts Group revenue growth of 17% and EBITDA growth of 20%.

For context, Worley secured an engineering, procurement and construction contract for Venture Global's CP2 LNG terminal in Louisiana, US. While the dollar value of the CP2 contract has not been explicitly disclosed, Venture Global says it expects to spend more than $10 billion.

Niraj also says the company's reported leverage, at 0.5x (1.5x net debt to EBITDA), is below its target range of 2-2.5x, placing management in a position to consider capital management, including share buybacks.

This article first appeared on Market Index on Wednesday 8 January 2025.