5N Plus Inc. (TSX: VNP) is a Canada-based company, actively engaged in producing specialty metal and chemical products. The company operates in two segments Electronic Materials and Eco-Friendly Materials.

Key Highlights:

• Improved revenue across both the segments: During Q1FY22, the company reported an increase in the total revenue to USD 64.42 million as compared to the total revenue of USD 46.87 million in Q1FY21. The specialty semiconductors segment saw a rise of close to 125% in sales to USD 27.30 million during the reported period (Q1FY22) against USD 12.14 million in Q1FY21. The company’s performance material saw a marginal increase in the sales of approx. 7% to USD 37.12 million in Q1FY22 as compared to USD 34.73 million in Q1FY21.

Source: Company presentation

• Strategic partnership with Rio Tinto: On May 11, 2022, the group announced that it entered into a commercial agreement with Rio Tinto, for refining the tellurium (used to manufacture solar panels and other high-tech equipment), which will be produced at its Kennecott copper operation in Utah. This partnership will add to the VNP’s sourcing and refining capacity of the various critical minerals across North America to cater to its industrial clients.

• Strong liquidity profile: The group’s quick ratio for Q1FY22 was reported at an elevated level of 1.41x, as compared to the industry median of 1.26x. Further, the company’s current ratio was stated at 3.04x for Q1FY22, against the industry median of 1.87x. The higher quick ratio and current ratio state the company’s ability to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

• Technical outlook: The stock showed a significant up-move after touching the lows of CAD 1.01 in March 2020 and made the lifetime high of CAD 5.01 in March 2021. From March 2021, the prices have declined gradually rather than witnessing and steep fall, which is a positive sign. The recent lows of CAD 1.03 have formed a strong base which also coincides with the previous lifetime lows of CAD 1.01. Another confluence is from the leading indicator: The Relative strength index (RSI), showing a reading of 32.81. The RSI has recently bottomed out from the oversold zone (below the 30 mark) and now trying to move towards the north. Any sustained movement of the prices above the support line can bring in a positive bias to the stock in the near term.

Risks associated with investment

The company is dealing in the niche segment of specialty metals and chemical products, which are subjected to fluctuating demand, making the revenues more volatile. Further, during Q1FY22, the company saw a jump of 49% in the interest on long-term debts as compared to Q1FY21, which is a serious concern, if the trend persists.   

   Financial overview of Q1FY22 (Expressed in thousands of USD)

   Source: Company Filing 

• During Q1FY22, the group reported an increase in its total revenues to USD 64.42 million as compared to USD 46.87 million in Q1FY21. The specialty semiconductors saw an increase of 125% in the sales for the reported period (Q1FY22) as compared to Q1FY21, whereas the performance material stated a marginal growth of 7% in the sales during Q1FY22 against Q1FY21.

• Company reported an operating loss of USD 4.71 million in Q1FY22 as compared to the operating income of USD 2.25 million in Q1FY21. Because of the increase in total expenses to USD 69.13 million in the reported period (Q1FY22) from the total expenses of USD 44.62 million in Q1FY21, the company incurred an operating loss.

• For Q1FY22, the company reported net loss of USD 5.75 million against the net income of USD 0.73 million in Q1FY21.
  

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported an increase in the total revenue of USD 64.42 million in Q1FY22 as compared to USD 46.87 million in Q1FY21. The management is optimistic about achieving the growth plan originally as well as inorganically and working towards developing AZUR and commercializing various other brands in its portfolio. Considering the inflationary pressure and ongoing geopolitical issues, the group estimated its adjusted EBITDA for FY22 in the range of USD 25 million to USD 30 million. On the valuation front, the stock is measured on the EV/Sales-based multiple, where the stock is currently offered at 0.6x as compared to the industry (basic material) average of 2.5x, stating the stock is still undervalued. We have considered FutureFuel Corp., Northern Technologies International Corp., etc as the peer group for the comparison.

Therefore, based on the above rationale, and valuation, we recommend a “Speculative Buy” rating on the stock at the last closing price of CAD 1.20 on May 18, 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 of May 18, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

  Technical Analysis Summary

Disclaimer

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