Neo Performance Materials Inc.

Neo Performance Materials Inc. (TSX: NEO) Inc is a rare earth metal processing firm situated in Canada. The company develops and distributes a wide range of rare earth designed goods, both light and heavy.

Why Investor’s Should Book Profit?

• Weak margin profile: The group posted lower profitability margin in Q3 FY21, as compared to the industry median, which indicates poor operational efficiency and remains a major concern for the company. Notably, NEO reported its gross margin and operating margin at 28.80% and 10.50%, respectively, significantly lower than the industry median of 34.10% and 13.90%. Additionally, net margin stood at 6.50%, also lower than the industry median of 8.70%.

• Long cash cycle days: The company’s Cash Cycle (Days) is increasing compared to the previous sequential quarter, implying the company is taking more days to convert its inventory to cash. In Q3 2021, its Cash Cycle stood at 208.7 days against 178.5 days in Q2 2021. Also compared to industry median its very high, which is at 79.1 days only.
  

• Deteriorating free cash flows: The company is clocking negative free cash flows on the regular basis, which is not a healthy sign. In the recent reported numbers, its free cash flow fell to negative USD 10.25 million against negative USD 5.47 million in Q2 2021.

• Stretched Valuations: NEO shares are available at an NTM EV/EBITDA multiple of 6.8x compared to the industry median of 3.0x, while on NTM P/E multiple, it is trading at 15.2x compared to the industry median of 3.2x. This implies that the shares are overvalued against the industry.

Source: REFINITIV, Analysis by Kalkine Group

• Hovering near the upper band of Bollinger band indicator: At the daily price chart, the stock of NEO closed near the upper range of its 20-days Bollinger band, indicting a possible correction from the recent level.

Technical Price Chart (as on November 12, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV/EBITDA

Stock Recommendation:

The company reported a 53.9% YoY increase in revenue at USD 119.8 million compared to USD 77.9 million in the third quarter of 2020. However, it failed to maintain its pace on a sequential basis, resulting in a weaker operational matrix, indicating that it is losing its edge. Additionally, the group is posting regular negative free cash flows, which is not a healthy sign. Also, the stock is trading at stretched valuations on multiple fronts compared to the industry. Moreover, it also holds a longer Cash Cycle (Days), indicating that the organization takes longer to convert inventory to cash. Even the technical indication implies that the stock’s price may correct or consolidate further. Therefore, based on the above rationale and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 20.71 on November 12, 2021.

One-Year Technical Price Chart (as on November 12, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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