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 which its customers use in several advanced electronics, optoelectronics, pharmaceutical, health, renewable energy and industrial applications.

Key highlights

• Recent Acquisition update: Recently the company acquired AZUR SPACE Solar Power GmbH (AZUR), which operates  in the development and manufacturing of multi-junction solar cells based on III-V compound semiconductor materials. The company has a strong portfolio of intellectual property of more than 120 patent families. As per the management, the above is expected to add more than EUR0 50 million yearly revenue and upto ~EURO 7 million of EBITDA. The above acquisition would help the group to expand its total addressable market into high-power electronics, electric mobility, wireless charging and advanced communications, and would reduce the dependence on a single revenue stream.
• Surge in backlog and bookings: The company reported constant growth in backlog and its total bookings, which is a healthy sign. Notably, backlog stood at USD 96.6 million in Q3FY21, higher than the USD 74.6 million in pcp. Additionally, the company reported a higher booking of USD 43.3 million, significantly higher than USD 23.2 million in pcp, supported by solid growth from both Electronic Materials and Eco-Friendly Materials operations.

Source: Company Filings

• Improved working capital management: The company reported a prudent capital management, which has led to improved quick ratio and current ratio at 1.96x and 3.75x, respectively, in Q3FY21, as compared to the industry median of 1.37x and 1.97x, respectively. The above indicates that the company has the group is able to meet its short-term liabilities through its current assets.
  

  Financial overview of Q3 2021 (In 000 of USD)

Source: Company

• In Q3 2021, the company’s posted revenue of USD 50.8 million, jumped from USD 39.8 million in pcp. The increase was driven by higher income from Eco‐Friendly Materials (USD 31.4 million vs USD 19.2 million in pcp).
• The group reported higher cost of sales, increase in SG&A expenses, partially offset by lower other expenses. Total costs stood higher at USD 48.8 million, as compared to USD 34.7 million in pcp.
• Operating earnings stood at USD 2.0 million, slide from USD 5.1 million in pcp, due to the surge in the input costs.
• The company reported a net loss of USD 0.7 million, as compared to net profit of USD 2.7 million in pcp.
  

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 input costs (Total expenses at USD 137.101 million in H1FY21, v/s USD 118.079 million in pcp. The continuation of the above trend remains as a major concern for the company as it would hamper the group’s margins and cash flows.

Stock recommendation

Against the backdrop of global supply chain issues created by the pandemic, the Company produced considerable sales growth in the third quarter of 2021, led by high demand in Eco-Friendly Materials. Following that, it acquired AZUR SPACE, which would help the company expanding its total addressable market into high-power electronics, electric mobility, wireless charging, and advanced communications, as well as minimize its reliance on a single income source, which is a big advantage.

Moreover the company is witnessing healthy surge in its orderbook, which reflects the confidence in the group. Furthermore, on the valuation front, the stock is available at a forward EV/ Sales multiple of 0.8x against an industry (Basic Materials) median of 1.5x. Hence, considering the aforesaid rationales, we recommend a “Speculative Buy” rating in the stock at the current market price of CAD 2.24 on December 13, 2021, at 9:52 am Toronto time with double-digit (percentage term) upside potential. 

Technical Analysis Summary:

One-Year Price Chart (as on December 13, 2021). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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