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

Key highlights

• Robust revenue growth: The company’s revenue grew by 40% in Q4 2021, hitting USD 64.6 million, up from USD 46.2 million the previous corresponding quarter, and USD 210.0 million for FY 2021, up from USD 177.2 million the previous year. Higher demand for the Performance Materials and the acquisition of AZUR aided both periods.

Source: Company Presentation

• Consistently rising EBITDA: Solid performance in the Performance Materials segment helped the company’s EBITDA in FY 2021 to stand higher at USD 25.0 million, up from USD 22.4 million in FY 2020. An increase in the EBITDA in the reported period is mostly due to reduced foreign currency and derivatives loss, as well as lower share-based compensation expenditure, offset by higher restructuring expenses, as opposed to greater net costs from impairment charges, litigation, and restructuring income in FY 2020.

Source: Company Presentation 

• An increase in Backlog and Bookings: The company reported increased backlog and total bookings on December 31, 2021, representing 221 days of annualized revenue, an increase of 47 days over the backlog on September 30, 2021, and a 32-day increase over the backlog on December 31, 2020. AZUR's contribution accounted for 31% of the entire backlog value as of December 31, 2021, and was included in Specialty Semiconductors' bookings in Q4 2021. Bookings also increased to 175 days in Q4 2021, up from 78 days in Q3 2021 and 133 days in Q4 2020.

Source: Company Presentation 

• Acquired “AZUR”: Recently the company acquired all of the issued and outstanding shares of AZUR for a total purchase price of 74.6 million euros. The acquisition of AZUR provides 5N Plus with a highly competitive specialty semiconductor value chain and meaningfully expands the product portfolio in various markets strategically. This will be a pivotal point in transforming its positioning in critical sectors such as high-power electronics, electric mobility, wireless charging, and advanced communications, thereby reducing the dependence on a single revenue stream.

• Trading at discounted valuations: The company’s shares are available at an NTM EV/Sales multiple of 0.8x compared to an Industry (Chemicals) median of 1.8x. While on NTM EV/EBITDA multiple the stock is trading at 6.1x compared to 7.2x. This implies that the shares are trading at discount against an industry median. The table below reflects the picture.

Source: REFINITIV, Analysis by Kalkine Group

• Enormous jump in net debts: The company's net debt increased to USD 80.1 million on December 31, 2021, up from USD 10.2 million at the end of the previous year. The acquisition of AZUR on November 5, 2021, was one of the major reasons for the rise in net debt.

Source: Company Presentation 

Risks associated with investment

The company is enclosed with many risk factors such as Interest rates, foreign currency volatility, overseas freight charges, etc. which may limit its ability to execute its strategy to achieve long‐term growth objectives. Furthermore, the company reported a surge in the net debt to USD 80.0 million V/s USD 10.1 million, which exposes it to the rising interest rates burden on its books, implying a significant balance sheet risk. 

Financial overview of FY 2021 (in thousands of USD)

Source: Company Filing 

• Higher revenues: In FY 2021, the company’s posted revenue of USD 209.9 million, jumped from USD 177.1 million in pcp. The increase was driven by higher demand for Performance Materials and the acquisition of AZUR SPACE Solar Power.

• Elevated operating expenses: The group reported a higher cost of sales as a % of revenue at 81.6% in FY 2021 V/s 79.5% in pcp. Its SG&A expenses and other expenses also grew in the reported period, as a result, its consolidated expenses stood at USD 197.1 million compared to USD 163.6 million in pcp.

• Slight decrease in operating earnings: The company’s operating earnings in FY 2021, stood at USD 12.8 million, slide from USD 13.4 million in pcp, due to the surge in the input costs.

• Rise in earnings before income taxes: In FY 2021, the company reported higher earnings before income taxes at USD 8.7 million compared to USD 7.2 million in pcp. Lower foreign exchange and derivative loss at USD 0.4 million V/s USD 2.7 million partially supported the company.

• Better net earnings: Primarily due to the above-discussed rationales in the reported period of FY 2021, the company stated higher net earnings of USD 3.1 million, as compared to USD 2.1 million in pcp, partially offset by increased income taxes.
  

Top-10 Shareholders 

The top 10 shareholders have been highlighted in the table, which forms around 49.76% of the total shareholding. Caisse de Depot et Placement du Quebec and Letko, Brosseau & Associates Inc. hold the company's maximum interests at 17.95% and 11.42%, respectively. The company's institutional ownership stood at 46.34%. Higher institutional holdings transform the confidence in retail investors.

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

Stock recommendation

Despite adverse worldwide business conditions, the company generated considerable sales increase in the fourth quarter and for the whole year. Incremental expenditures related to overseas freight and consumables also had an impact on the results. With the completion of its strategic acquisition of AZUR and a thorough due diligence procedure in Q4 of 2021, the firm built a unique specialty semiconductors platform. The acquisition of AZUR improves the company's value chain, competitive capabilities, and future commercial potential, which is a key positive

Furthermore, the company has seen a solid increase in its order book, which underscores the group's confidence. Moreover, the stock is accessible at a discount on the value front. On a cautionary note, the corporation carries a significant debt burden, implying a significant balance sheet risk. Hence, considering the aforesaid rationales, we recommend a “Speculative Buy” rating in the stock at the closing price of CAD 2.23 on February 22, 2022, with double-digit (percentage term) upside potential. 

One-Year Price Chart (as on February 22, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

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