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, which company has acquired previously contribution around 31% of the entire backlog value as on December 31, 2021 and was included in Specialty Semiconductors' bookings in Q4 2021.

Source: Company Presentation

Risks associated with investment 

The company is enclosed with many risk factors 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. The company is carrying a high debt burden on its shoulders, which implies a huge balance sheet risk. 

Financial overview of FY 2021 (in thousands of USD)

Source: Company Filing

• 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.

• The group reported 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.

• 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.

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

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

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

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 with 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

On a cautionary note, the company carries a significant debt burden, implying a significant balance sheet risk. Furthermore, the company has seen a solid increase in its orderbook, which underscores the group's confidence. Hence, considering the aforesaid rationales, we recommend a “Speculative Buy” rating in the stock at the closing price of CAD 2.06 on March 15, 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 March 15, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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