5N Plus Inc. (TSX: VNP) is a Canada-based company, which is a producer of specialty chemicals and engineered materials. 5N Plus provides a range of technologies to manufacture products which are used by its customers in several advanced electronics, optoelectronics, pharmaceutical, health, renewable energy, and industrial applications.

Investment Rationale

• Registered a Breakout Above Downward Sloping Trend Line: After month of bearishness in the stock, VNP shares has registered a bullish breakout above the downward sloping trend line and sustained above the line for two consecutive sessions, which implies bullish trend reversal. Further, momentum indicator 14-day RSI also supporting the trend, with RSI registered a strong bullish range shift and hovering in neutral zone with bullish bias at 51.6. This implies that bulls are gaining control over bears.

Technical Chart (as on October 12, 20210). Source: REFINITIV, Analysis by Kalkine Group

• Potential MACD Crossover in Next Few Trading Session: The leading momentum indicator Moving Average Convergence Divergence (MACD) is rising, and a potential bullish crossover could be seen in next few trading sessions, where MACD oscillator will crossover 9-day SMA signal line, which will bring VNP shares in a bullish territory.

Technical Chart (as on October 12, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Robust Financial Risk Profile: The company has relatively lower debt contribution in its total capital structure, with Debt/Equity ratio of 0.41x at the end of June 30, 2021, compared to industry median of 0.83x, which implies lower balance sheet risk. Further, the company’s risk protection metrices are quite strong with Net Debt/EBITDA ratio as of June 30, 2021 stood at 2.54x compared to industry median of 7.10x, which implies that company is using debt quit sensibly.

• Ample Liquidity: As on June 30, 2021, the company’s Current ratio stood at 3.91x, improved from 3.58x as of March 31, 2021. This is significantly higher compared to the industry median of 2.15x. Moreover, the company’s quick ratio is robust and stood at 2.07x as of June 30, 2021, compared to industry median of 1.47x. This implies that the company has ample liquidity to cover its short-term obligations.

• Higher Institutional Holding: The institutional holding in the company stood at 54.58%, which is significantly higher given the penny cap market categorization of the company. Higher institutional holding in a penny cap company provides a greater confidence to the retail investors, as it reduces the chance of financial shenanigans. Moreover, Pension Funds are holding approximately 22.94% stake in the company.
  

• Capacity Expansion: On June 02, 2021, the company announced its investment of USD 8.5 million in its Montreal campus. With this investment, 5N Plus would expand the capacity of its Montreal campus to address the growing demand of II-VI semiconductor compounds and powders, including those essential for the renewable energy market.

Risk Associated with Investment

The company is exposed to metal price risks, especially volatility in the prices of Bismuth, Germanium, Selenium and Tellurium. Further, a slowdown in  upstream activities would be a challenge for the company. Other risks include Interest rate risk, Forex risk and inflationary pressure. 

Financial Highlights: Q2FY21

Source: Company Filings

• Revenue up ~16% on a YoY basis: During the quarter under consideration, the company’s revenue reported at USD 47.7 million, up ~16% on a YoY basis, favorably impacted by higher demand.
• Improved Bottom line: Net Income during the second quarter of 2021 stood at USD 2.2 million compared to USD 1.7 million reported a year before.
• Backlog and Bookings: As of June 30, 2021, the company’s backlogs represented 199 days of annualized revenue, well above the previous quarter. Further Bookings has reached to 99 days in the second quarter under consideration than compared to 66 days for the same period last year.
• Increased Net Debt: Net Debt as on June 30, 2021, stood at USD 14.1 million, up from USD 10.2 million reported as on December 31, 2020.
• Gross Margin Declined: During the quarter under consideration, the company’s gross margin stood at 25% compared to 31% reported a year before.
• ROCE: Annualized ROCE stood at 12.2% in the quarter just gone by compared to 14.4% in the same quarter of the previous financial year.

Top-10 Shareholders

Top-10 shareholders together holds approximately 57.10% stake in the company, with Caisse de Depot et Placement du Quebec and Letko, Brosseau & Associates Inc. are the major shareholders with  an outstanding position of 19.38% and 12.33% respectively.

Valuation Methodology (Illustrative): EV/Sales Based Valuation Metric

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

Despite heightened inflationary pressure on the margin profile of the company, its Eco-Friendly Materials delivered an outstanding performance in the second quarter of fiscal 2021, producing significant revenue growth while adapting to the recovery challenges from the global pandemic, while Electronic Materials performing in line with the Company's expectations.

Further, the company ended the second quarter with strong backlog reflecting solid demand for their products. The Company also strengthened its competitiveness and environmental impact, following the announcement of an USD 8.5 million investment into its Montreal campus and having made positive progress toward closing its acquisition of AZUR SPACE Solar Power GmbHR SPACE Solar Power GmbH.

However, given the penny cap market capitalization of the company, investors are exposed to variety of risks.

Hence, based on the rationale discussed above and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 2.86 on October 12, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary:

1-Year Price Chart (as on October 12, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on October 13, 2021, 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.