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

Why should Investors make an EXIT? 

• Clocked Lower volume: The company witnessed lower volume under Magnequench and Chemicals & Oxides segment. However, Rare Metals segment clocked upper volume, which helped the company in posting strong numbers, any continuation in clocking lower volume, could bring a negative effect on the company’s financials.      

• Long Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 205.1 days compared to an industry median of 73.8 days. Moreover, its cash cycle days is increasing on sequential basis, which raises some concern.

• Elevated average inventory days: On the one hand, the company is holding longer cash cycle days, resulting in lower cash and cash equivalents at USD 61.4 million against 89.0 million in pcp, while on the other hand, average inventory days are also growing sequentially. In the first quarter of 2022, the company's average inventory days were 163.1 days, compared to an industry median of only 79.8 days. All of these reasons, we believe, might weaken the company's liquidity profile, which would be a bad indicator.
  

• Trading above the upper band of the Bollinger Bands: Recently, the stock witnessed a healthy rally on the daily price chart and has moved close to the upper band of the Bollinger band, also it might face a resistance at the current level, where the stock is trading, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

 Valuation Methodology (Illustrative): Price to Earnings

*1USD=1.28CAD

Analysis by Kalkine Group 

Stock recommendation 

The company clocked healthy results on the back of strong performance of Rare Metals segment, however the volumes of other two segments dived to the south pole. Declining volume in these segments is a caution for the long term. Moreover, it has a prolonged Cash Cycle (Days), and higher average inventory days, which may create a difficulty for the company to have enough cash on hand to meet their financial obligations. Even the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the last closing price of CAD 13.80 on May 17, 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 May 17, 2022). Source: REFINITIV, Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

Disclaimer

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