Shortage of AdBlue? Go long DGL Group (ASX:DGL)

DGL Group: AdBlue shortage  creates a speculative opportunity on ASX

In early December, it emerged that a global shortage in Urea, a main ingredient to produce AdBlue, might bring Australia’s economy to a grinding halt in a matter of weeks. You have probably never heard of AdBlue before, but if Australia runs out of AdBlue entirely, everyone will be affected. AdBlue is a must-have fuel additive for diesel engines and lack of AdBlue means serious problems for the logistics industry.

The price of AdBlue has multiplied after China, the biggest producer of Urea in the world, banned the export of Urea and expectations are that the shortage of Urea will last for the next three to four months at least. Our technical analysis shows that this may have created a nice speculation opportunity in the stock of DGL group (ASX:DGL).

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We like DGL fundamentally

We wrote about DGL group in our Small Cap Stocks Down Under edition on 20 August 2021 and gave it a four-star rating with a buy signal at $1.89. Since then, DGL acquired the producer of AdBlue – AUSblue – and now owns 60 percent of the market for AdBlue in Australia. The CEO and founder of DGL group, Simon Henry, explained in an interview in mid-December how the company has secured enough supply of Urea from Middle Eastern countries, after China banned exports of Urea. This puts DGL in a perfect position to benefit from the high price of AdBlue and it probably explains the recent on-market stock purchases by Mr. Henry.

DGL from a technical analysis perspective

Below is the daily chart for DGL since its IPO in May 2020. The primary uptrend in the share price demonstrates its strong underlying fundamentals and a growing, successful business. After a price correction, almost to the 50% Fibonacci retracement level, at the end of November, a new rally in the price has started.

At the moment, the shares are trading right below the medium-term downward trendline after having completed a pull-back to the broken long-term uptrend. This consolidation in the price has formed a flag pattern, which is a continuation pattern in technical analysis. Lots of profit taking activity is taking place around the current share price level. The fact that the price has been able to hold up for several consecutive trading sessions despite the current selling pressure shows the high level of enthusiasm among buyers. This is a signal that a breakout is a highly likely scenario. Thus, there is an opportunity for speculators to ride the rest of the rally on the back of further potentially positive AdBlue-related news from the company.

DGL Group, Daily Chart (Source: Metastock)

What are potential target prices?

In the case of a successful breakout, the first target is at the all-time high price of $3.30. The second target is somewhere in the blue box, which is the target for the flag pattern and points to $3.70 to $4.00.

What about stop-losses?

Important stoploss levels are shown in green. The upper green line is at $2.60 and it is a level that gives an early signal that the momentum has left DGL if the price falls below it.  In that case, further serious advances in the share price are less likely. A break below the lower green line at $2.20 signals that the whole AdBlue story that sparked the DGL rally in the first place will likely peter out.

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Frequently Asked Questions about DGL Group

• What is AdBlue?

  AdBlue is a diesel exhaust fluid used in vehicles with Selective Catalytic Reduction (SCR) technology to reduce harmful gases being released into the atmosphere.

• Who is DGL Group?

  DGL Group solves problems for customers by providing formulation and manufacturing for a range of potentially dangerous and reactive chemicals, the transport and storage of these chemicals within a highly licensed transport and warehouse network, and the disposal or recycling required to safely manage the full life cycle of these chemicals.

• Does DGL Group pay a dividend?

  No, DGL Group does not pay dividends at this time?