Neo Performance Materials Inc. (TSX: NEO) is engaged in the innovation, development, processing, and manufacturing of rare earth and rare metal-based functional materials. The group’s operating segments include Magnequench, Chemicals & Oxides and Rare Metals.

Key Updates:

• Positive Long-term Outlook: The company’s products are expected to be used for several new-generation businesses like Electric vehicles, Water Purification, Energy Efficient Homes & Factories etc. Notably, the company’s neodymium-iron-boron (NdFeB) magnets are likely to be used for Electric Vehicles and Heavy Electric Vehicles models, which is the future of the automobile industry. As per a recent study, demand for NdFeB Magnet is likely to grow at CAGR of 23.3% from 2022 to 2023. We believe the company is highly poised to take advantage of the growing demand arising from the industry.

• Strong Growth in Consolidated Sales: In FY21, the company’s reported its income of CAD 539.3 million, which is 55.5% higher than FY20. The surge was supported by strong volume growth across all the operating segments, supported by due to the economic recovery along with higher demand for the magnetic, such as the electrification of automobiles and other environmentally sustaining technologies.

• Expansion Strategy: Within the rare earth segment, NEO is planning to expand its customer base and would focus on introducing several value-added products for its customers. Recently, the company collaborated with Energy Fuels Inc., and would create products from natural monazite sands, a byproduct of heavy mineral sands mined in the southeastern United States. This is expected to lead to improved prospects for the company in the coming days.

• Ample Liquidity: The company reported its quick ratio and current ratio of 1.35x and 2.88x, respectively, in FY21, as compared to the industry median of 1.30x and 1.92x. This indicates that the company is able to meet its short-term liabilities with its current assets.

Risks associated with the investment:

The company’s operations might be hindered on account of a lower level of activities from the end market due to several reasons like semiconductor chip shortage, lower corporate order book, sluggish demand for technology and related products etc.

FY21 Financial Highlights: (in thousands USD)

• NEO announced its FY21 result, wherein it posted an income of USD 539.2 million, significantly higher than USD 346.6 million in FY20, driven by solid growth from all three operating segments on the backdrop of economic recovery.
• Despite a higher cost of sales, the group posted a higher gross profit of USD 150.5 million, as compared to USD 80.3 million in FY20, thanks to the higher income as mentioned above.
• The company reported its total expenses of USD 90.6 million, as compared to USD 135.9 million in FY20. This was primarily due to a lower impairment of assets, partially offset by higher selling, general & administrative expense and elevated research & development expense. Due to the above reasons, the company reported an operating income of USD 59.8 million, as compared to an operating loss of USD 55.6 million in FY20.
• The corporation posted a net income of USD 36.0 million, as compared to a net loss of USD 60.0 million in FY20. This is due to a higher operating income as mentioned above, partially offset by higher net finance costs and an increase in other expenses.
  

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company has long standing relationships with industry leaders and OEM’ clients, and offers value proposition for them, which would continue to support the company’s upcoming order-book as well. Apart from this, the stock of NEO carries an attractive dividend yield of ~2.747% on an annualized basis, which looks impressive considering the ongoing interest rate scenario. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like IBI Group Inc, FutureFuel Corp and 5N Plus Inc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of NEO at the last closing price of CAD 14.56 on April 18, 2022. 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 18, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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