Company Profile

5N Plus Inc (TSX: VNP) is a Montreal, Canada-headquartered company. The group is a leading producer of speciality chemicals and with integrated recycling and refining assets to manage the sustainability of its business model. The group is engaged in deploying proprietary and proven technologies to meet the specifications of customers demand, securing long-term sourcing contracts with primary producers. The company has two reportable segments, namely Electronic Materials and Eco-Friendly Materials. Electronic Materials segment operates in North America, Europe and Asia and sells refined metals, compounds, and alloys, which are primarily used in several electronic applications. The Eco-Friendly Materials segment is associated with bismuth, one of the few heavy metals which have no detrimental effect on either human health or on the environment.

Investment Rationale

• Improving Earnings and Margins Amid Challenging Environment: Gross Margin expanded from 22.4% in Q1 2019 to 24.4% in Q1 2020, despite operating inefficiencies attributed to the outbreak of the COVID-19 virus. The increase was driven by the sale of products with lower metal content and higher value-added revenue. Also, the company reported earnings per share of USD 0.01 against a loss per share of USD 0.01 for the same period of the previous financial year.
• Strong Balance Sheet: The company has a strong balance sheet with debt to equity ratio of 0.56x and the long-term debt contribution to the total capital stood at 35.1%. The debt seems to be manageable as the interest coverage ratio stood at 2.01. Further, the company had ample liquidity of USD 22 million at the end of Q1 2020, which is likely to meet the near-term requirement. The company has reduced its net debt significantly since the last quarter of 2011. Net debt reduced to USD 35 million in Dec 2019 from USD 261 million in Dec 2011. However, net debt at the of the Q1FY20 increased to USD 38 million from USD 35 million on a sequential basis, mainly due to the drawdown of USD 5.0 million on the company's credit facility for working capital purposes. Further, Net Debt to EBITDA significantly lowered to 6.71 at the end of Q1FY20 as compared to the 11.59x at the end of Q4FY19, which implies that the company has significantly lowered its balance sheet risks amid challenging market condition.

Net Debt Evolution (in a million, USD)

Source: Company Presentation

• Improving ROCE: The group’s annualized ROCE improved to 10.6% compared to 8.2% at the end of 2019. The improvement was led by margin expansions and reduced interest expenses on long-term debt and imputed interest.
• Serving critical sectors which are driving the growth: The company’s electronic material used in electronic devices and the demand is coming from Security, Aerospace, Sensing, and Imaging sector. Eco-friendly materials are used in the pharma and healthcare sector, mining, and petrol chemical sector. Further, the group is the number one global supplier of bismuth chemicals. Electronic Materials segment delivered substantial earnings growth as compared to the same period last year, despite the headwinds in recycling and refining activities.
• Risks Associated to Investment: The company is exposed to metal price risks, especially volatility in the prices of Bismuth, Germanium, Selenium and Tellurium. Further, lower upstream activities would be a challenge for the company in the near term. Also, the company is exposed to off-balance sheet risks such as currency exchange risks on sales in Euro and other currencies. However, the group periodically enters into foreign currency forward contracts to protect itself against currency fluctuation.

Recent Development

On June 03, 2020, the company’s subsidiary 5N Plus Semiconductors has signed a contract with the U.S. Government amounting to USD 12.45 million. The agreement is aimed at advancing the process and product technologies for specialty semiconductors required by U.S. satellite suppliers. The group is the sole domestic suppliers of these critical products and will be addressing the future technological requirements for the next 39 months. The group will enhance the sustainability of critical products required in the domestic supply chain for Space. 

Financial Highlights: Q1FY20

Source: Company Filings

In the three months under consideration, the group's revenue declined by 3% to USD 49.954 million against USD 51.413 million. The decline was attributed to the relatively lower metal prices during the period, while the overall volume of product sold in Q1 2020 was higher than the same period last year. Gross Margin for the first quarter of FY20 improved to 24.4% from 22.4% in Q1 2019, despite operating inefficiencies attributed to the outbreak of the COVID-19 virus, abetted by the sale of products with lower metal content and higher value-added revenue.

The group’s EBITDA stood at USD 6.2 million, up from USD 4.2 million recorded in the previous corresponding period (pcp). Adjusted EBITDA also improved to USD 6.9 million compared to USD 5.6 million in pcp. The improvement in EBITDA was driven by higher downstream volume during the quarter, mitigating the shortfall from Recycling and Refining activities due to low metal notations. Net earnings for the first quarter under review stood at USD 0.6 million or USD 0.01/share compared to a net loss of USD 1.1 million or USD 0.01/share for the same period of the FY19. Annualized Return on Capital Employed (ROCE) reached 10.6% for the Q1FY20 compared to 8.2% for the full year of 2019. As of March 31, 2020, the group’s net debt stood at USD 38.1 million against USD 35.0 million reported at the end of December 31, 2019, impacted by additional working capital and contingency planning, given the current global business environment.

In the first quarter of 2020, the company’s Eco-Friendly Materials segment experienced the impact from COVID-19 outbreak, as mandatory plant shutdowns ordered by local governments impacted the segment. However, the impact on Eco-Friendly segment was broadly offset by Electronic Materials segment, which delivered substantial earnings growth compared to the same period last year, despite the headwinds in recycling and refining activities. This growth was driven by margin expansion across nearly all businesses.

Stock Performance

At the closing (July 07, 2020), shares of VNP traded flat at CAD 1.65. In a year over the period, its shares have registered a 52W high of CAD 2.72 (July 18, 2019), and a 52W low of CAD 1.01 on March 23, 2020. At the last traded price, VNP’s shares traded approximately 39% below its 52W high price and approximately 63% above 52W Low price level, which implies that at the last traded price VNP shares were more tilted towards its 52W high price level.

1-Year Price Return (as on July 07, 2020, after the market close). Source: Refinitiv (Thomson Reuters).

In a year over period, its shares have plummeted approximately 37.7%, however, outperformed the sector peers by 1.81%. On a YTD basis, its shares have slumped approximately 32.9%; however, in a 3-Month period, its shares are featuring a price return of 13.8% and significantly outperformed the sector peers by 22.04% at the same time. 

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together form around 58.87% of the total shareholding. Caisse de Depot et Placement du Quebec and Letko, Brosseau & Associates Inc. holds the maximum interests in the company at 19.23% and 14.99%, respectively. The institutional ownership in the VNP stood at 59.98%, and ownership of the strategic entities stood at 4.12%.

Source: Refinitiv (Thomson Reuters).

Stock Recommendation: At the last traded price of CAD 1.68 (July 7, 2020), shares of VNP traded approximately 12% above its 1-month support level of CAD 1.51 made on June 17, 2020, and also trading approximately 66% above its near-term bottom level of CAD 1.01, which is a positive technical trend. Also, the RSI divergence appeared on the daily price chart, as the stock traded flat against the previous closing level, but 14-day Relative Strength Index (RSI) increased, which is also a positive technical measure.

Further, the company has a strong balance sheet with liquidity of USD 22 million, which seems enough to pass through the challenging market condition.  The group’s quick ratio at the end of Q1FY20 was 2.03x, which was higher than the industry average of 1.26x. The group’s margins and profitability measure expanded in the first quarter of the FY20, despite a challenging market condition which is encouraging. The company is serving critical sectors such as Security, Aerospace, Sensing and Imaging, healthcare, petrochemical and mining, and these sectors are driving the demand.

From the valuation standpoint, the stock is trading at a discount to the industry. The stock is trading at a forward EV/Sales multiple of 0.6x and forward EV/EBITDA multiple of 3.9x against the chemical industry median of 1.7x and 7.8x, respectively.

Therefore, based on the above rationale, we have given a “Speculative Buy” recommendation at the closing price of CAD 1.68 (on July 07, 2020), with lower double-digit upside potential.

*Recommendation is valid at July 8, 2020 price as well.

Disclaimer

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