The Allkem Ltd (ASX: AKE) share price is enjoying a rally on Tuesday amid some positive broker sentiment.
Shares in the lithium developer are currently going for $14.025 each, up 4.04%, after hitting an intraday high of $14.14 this morning. That's almost 5% higher on the day.
For context, the S&P/ASX 200 Materials Index (ASX: XMJ) is 0.11% lower at the time of writing while the S&P/ASX 200 Index (ASX: XJO) is up just 0.05%.
The Allkem price surge comes after Macquarie gave the company a very bullish price target of $21 per share, a further 55% upside. Let's investigate what the broker said.
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Why did Macquarie give Allkem a 55% upside?
Macquarie used a couple of valuation techniques to arrive at the projected fair value of Allkem shares. These included calculating its net present value and forward enterprise value to earnings before interest, taxes, depreciation, and amortisation (EBITDA) ratio, as the Australian Financial Review reported.
The broker said:
AKE continues to highlight the tripling of production by 2026 to 120ktpa and has highlighted that numerous studies are underway to target the next leg of growth beyond 2026. Buoyant lithium prices continue to drive material upside, with [free cash flow] yields above 30 per cent from FY26 at spot prices.
As part of the analysis, the broker also projected free cash flow and sales forecasts for FY23. Macquarie expects Allkem to have a free cash flow of $595 million and sales of $1.57 billion.
This outlook for Allkem comes amid broader positive developments for ASX lithium shares over the last week.
These include an increased price target for lithium itself and the US state of California mandating that all new vehicles sold in the state are to be EV or hydrogen-powered by 2035.
Allkem share price snapshot
The Allkem share price has had a buoyant year so far, trading 34% higher year to date. Meanwhile, the broader Materials Index has recorded an 8% loss over the same period.
The company's current market capitalisation is around $8.93 billion.
