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.

Revenue Mix

Source: Refinitiv (Thomson Reuters)

Investment Rationale

• Strong Liquidity: At the end of the second quarter of FY20, the company’s current ratio stood at 4.56x, whereas industry median current ratio stood at 2.24x. This reflects that the group had ample liquidity to cover its short-term obligations. Further, the company’s quick ratio at the end of the second quarter of FY20 stood at 2.02x vs industry median of 1.39x.

Current Ratio and Quick Ratio of VNP vs Industry median. Source: Kalkine Group, Refinitiv (Thomson Reuters)

• Improvement in Annualized ROCE: Annualized Return on Capital Employed (ROCE) reached 12.6% for the second quarter of 2020 as compared to 8.2% for the same period last year. We use ROCE to measure the return on capital employed, whether the financing is through equity or debt. In our view, this measure provides useful information to determine if the capital invested in the Company yields competitive returns.

Annualized ROCE. Source: Company Presentation

• Relative Price Strength: VNP Shares have recorded solid performance on the exchange over the past 3-months, 1-month and 5-day trading sessions and outperformed the benchmark TSX Composite Index at the same time. VNP share relative outperformance against the index over the past 3-months stood at 15%, 13% in the past one month and 3% in the last 5-day trading sessions. Further, its shares have outperformed its peer’s over the past one month and 5-day trading session.

Relative Price Performance VNP vs S&P/TSX Composite. Source: Refinitiv (Thomson Reuters)

• Shares Trading Above Crucial Support Levels: VNP shares are trading in a bullish zone, with price moving above the crucial short-term as well as long-term support levels of 200-day, 100-day and 50-day SMAs, a bullish technical indicator. Further, the moving averages are also rising, which is another bullish indicator. More importantly, the leading momentum indicator, MACD is rising and hovering above the 9-day SMA signal line, with the spread between 12-day and 26-day EMA is positive, another bullish indicator.

Technical Price Chart (as on October 27^th, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

• Insiders are Increasing Position: Over the past one year, insiders have increased their outstanding position for eight times, which implies that the insiders are bullish on the company’s future performance. They have capitalized the opportunity to accumulate shares at a discounted price led by COVID-19 pandemic. Further, most of the insider’s activities took place post-COVID-19 crisis, which indicate that the insiders are bullish on the stock. 

Insiders Activity Over the Past 1-Year. Source: Refinitiv (Thomson Reuters)

• 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 is near term. Also, the company is exposed to off-balance sheet risks such as currency exchange risks on sales in Euro and other currencies, and however, the group periodically enters into foreign currency forward contracts to protect itself against currency fluctuation.

Financial Highlights: Q2 FY20

Revenue: Revenue for the second quarter of 2020 and the six‐month period ended June 2020 reached US$41.1 million and US$91.1 million compared to US$50.3 million and US$101.7 million during the same periods of 2019.  The revenue attributed to the sale of metal in Q2 2020 was significantly lower than the same period last year driven by near historic lows in relevant metal notations. Revenue contribution from higher value‐added businesses was higher during the same period, partly mitigating lower metal revenue.  

Source: Company Presentation

Gross Margin: The group delivered record level gross margin as a percentage of revenue, despite near historic lows in relevant metal notations which have resulted in sub‐optimized conditions for the Company’s upstream activities and headwinds from COVID‐19 pandemic. During the quarter and year‐to‐ date, gross margin grew by 9% and reached at record levels for the Company.

Source: Company Presentation

EBITDA: Adjusted EBITDA and EBITDA for the second quarter of 2020 reached US$7.6 million and US$6.5 million compared to US$5.9 million and US$5.3 million during the same quarter of 2019, favourably impacted by increased contribution from semiconductor compounds, semiconductor engineered substrates and productivity gains from the operating activities against the backdrop of a stable but low metal notations.

Source: Company Presentation

Improving Metal Prices (in U.S. dollars per kilo)

 Source: Company Presentation

Other Highlights

• Net earnings for the second quarter of 2020 were US$1.7 million, equivalent to the same period last year and US$2.3 million for the six‐month period compared to US$0.6 million for the same period last year.
• Annualized Return on Capital Employed (ROCE) reached 12.6% for the second quarter of 2020 as compared to 8.2% for the same period last year.
• Net debt stood at US$24.4 million as of June 30, 2020, down from US$38.1 million as of March 31, 2020.

• As of June 30, 2020, the backlog reached a level of 202 days of annualized revenue, a similar level than in Q2 2019, however higher than the Q1 2020 at 188 days. Bookings in Q2 2020 reached 66 days compared to 62 days in Q1 2020 and 86 days in Q2 2019.
• On June 3, 2020, 5N Plus announced that its subsidiary, 5N Plus Semiconductors, located in St. George, Utah, signed a US$12.5 million contract with the U.S. Government aimed at further advancing process and product technologies for specialty semiconductors required by U.S. satellite suppliers. As the sole domestic source of these critical products, over the next 39 months, 5N Plus Semiconductors will address future technological requirements and enhance the sustainability of critical products required in the domestic supply chain for Space.
• SG&A expenses in Q2 2020 and YTD 2020 were US$4.6 million and US$9.5 million respectively compared to US$5.5 million and US$11.0 million for the same periods of 2019. In 2020, the expenses were positively impacted by favourable exchange rates across most local currency denominated expenses when compared to 2019, as well as lower travel and consulting expenses, either avoided or delayed, due to the COVID‐19 pandemic.
• Financial expense in Q2 2020 amounted to US$1.5 million compared to US$1.1 million in Q2 2019. The increase was mainly due to higher loss in foreign exchange and derivatives compared to the same period last year.  
• Cash generated by operating activities amounted to US$16.2 million in Q2 2020 compared to cash used in operating activities of US$0.6 million in Q2 2019

Segment Highlights

• Electronic Materials Segment Adjusted EBITDA in Q2 2020 increased by US$2.0 million to US$6.7 million representing an Adjusted EBITDA margin of 34% compared to 25% in Q2 2019.
• Eco‐Friendly Materials Segment Adjusted EBITDA in Q2 2020 increased by US$0.1 million to US$3.6 million representing an Adjusted EBITDA margin of 17% compared to 11% in Q2 2019

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 61.04% of the total shareholding. Caisse de Depot et Placement du Quebec and Letko, Brosseau & Associates Inc. holds the maximum interests in the company at 19.33% and 15.06%, 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)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation: The company reported decent performance in the second quarter of FY20, with Cash generated by operating activities improved significantly to US$16.2 million in Q2 2020 compared to cash used in operating activities of US$0.6 million in Q2 2019. 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.

Further, Annualized Return on Capital Employed (ROCE) reached 12.6% for the second quarter of 2020 as compared to 8.2% for the same period last year. The company has a strong balance sheet with debt to equity ratio of 0.51x 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 2.01x.

More importantly, VNP shares are trading in a bullish zone, with prices moving above its crucial short-term as well as long-term support levels of 200-day, 100-day and 50-day SMAs.

Therefore, based on the above rationale and valuation done, using the above methodology, we have given a “Speculative Buy” recommendation at the closing price of CAD 1.99 (as on October 27, 2020), with lower double digit upside potential, based on the NTM Industry Average EV/EBITDA multiple of 5.1x, on the FY20E EBITDA.

*Recommendation is valid at October 28, 2020 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.