Neo Performance Materials Inc. (TSX: NEO) is actively engaged in the innovation, development, processing, and manufacturing of rare earth and rare metal-based functional materials. The company operates across Asia, North America, Europe, and other geographies. The primary segments of its operations cover Magnequench, Chemicals & Oxides & Rare Metals.

Key highlights:

• Improved performance across the segments in FY21: The company reported increased revenue across its major segments during FY21 which collectively stood at USD 539.25 million as compared to USD 346.69 million in FY20. Below is the pictorial representation of how each of the major segments flared in FY21.

Source: Company filings

• Higher adjusted EBITDA: For FY21, the company reported an increased adjusted EBITDA of USD 81.9 million against the adjusted EBITDA of USD 28.8 million in FY20. The major contribution is from Magnequench segment, which reported an increase in adjusted EBITDA of USD 18.0 million in FY21, and C&O segment which recorded an increase in adjusted EBITDA of USD 27.56 million in FY21. 

• Well-managed debt: Below is the graphical representation stating how the company has managed its debt during FY21 as compared to the industry median during the same period.

Source: Refinitiv, Analysis by Kalkine Group

• Improved profitability margins: During FY21 the company witnessed increased production, coupled with higher selling prices of the rare earth products, and cost optimization, which improved the profitability margins. Below is the graphical representation of the improved profitability margins in FY21 as compared to FY20.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The group is exposed to any fresh lockdown restrictions and supply chain disruptions pertaining to rising COVID-19 cases. Further, any slowdown in the economic recovery might hamper the demand, resulting in declining revenues.   

Financial overview of FY21 (Expressed in thousands of USD)

 Source: Company Filing

• The company witnessed an increase of 55.54% in the total revenue to USD 539.25 million in FY21 as compared to the total revenue of USD 346.69 million in FY20. The increase in revenue was on backed by the rise in volumes across all the segments, and further supported by the economic recovery witnessed during FY21 after the lockdown relaxation and rising demand.

• The gross profit for FY21 increased to USD 150.52 million against USD 80.33 million. The increase in revenues partially negated the impact of higher costs excluding depreciation and amortization, resulting in an overall higher gross profit in FY21.

• The operating income, on account of declining expenses, increased to USD 59.88 million in FY21 against the operating loss of USD 55.65 million in FY20.

• The company reported a Net income of USD 36.04 million in FY21, vs net loss of USD 60.08 million in FY20.
  

Valuation Methodology (Illustrative): EV to EBITDA based valuation

Source: Refinitiv, Analysis by Kalkine Group

Stock recommendation

On March 9, 2022, the company declared a quarterly dividend of CAD 0.10 per share which is payable on March 30, 2022. During FY21 the cash and cash equivalent rose to USD 89.03 million from USD 72.22 million, which is a key positive to carry out its expansionary plans in terms of acquisitions. Further, the group transitioned from net loss of USD 60.08 million in FY20 to net income of USD 36.04 million during FY21, on account of higher revenues contributed by all three major operating segments and improved economic activity. On the valuation front, the stock is measured on the EV to EBITDA valuation multiple and the stock is currently trading at a multiple of 3.5x during FY21 against the industry median (Basic Materials) of 4.5x, implying there is enough room for the stock to match its peers.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing market price of CAD 12.91 on April 29, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 29, 2022). Source: REFINITIV, Analysis by Kalkine Group

 Technical Analysis Summary

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.