5N Plus Inc.

5N Plus Inc. (TSX: VNP) is a Canada-based company, which is a producer of specialty chemicals and engineered materials. The company 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: 

• Acquired Stake in Microbion: On January 12, 2021, the company announced that it has taken an equity stake in Microbion and will assume responsibility for the manufacturing of Bismuth-based Active Pharmaceutical Ingredients (API) required in Microbion's family of drug products.  The company is uniquely positioned to support Microbion in the development of this new class of compound. In the initial phase of the collaboration between the two companies, 5N Plus will be supporting Microbion's clinical development programs. 

• Steady Backlog: In Q3 2020, the Backlog reached at 171 days of annualized revenue, lower than previous quarter which ended at 202 days. The net difference in backlog is largely attributed to the timing associated with the negotiation of long-term contracts some of which are well underway and are expected to be completed early next year. On November 9, 2020, the Company secured multi-year contracts within Electronic Materials segment, more precisely in the Renewable Energy Sector. The renewal of these contracts is expected to significantly improve the backlog and bookings and would be reflected in the fourth quarter 2020 reporting period. 

• Secured multi-year contracts: Recently the company announced that it has secured multi-year contracts for the supply of semiconductor materials associated with the manufacturing of thin-film photovoltaic (PV) modules by First Solar, Inc. We believe the specialty semiconductor market continues to be a natural growth space for the company as it further expands the portfolio of advanced engineered materials based on unique value propositions desired by its customers across a broad spectrum of applications.

• Reduced Net debts: Net debt after considering cash and cash equivalents, decreased by 10.4 million, from USD 35.0 million as at December 31, 2019 to USD 24.7 million as at September 30, 2020.

Source: Company 

Financial overview of Q3 2020 (in thousands of United States dollars)

Source: Company

• In Q3 2020, the company reported revenue of USD 39.8 million, compared to USD 49.5 million in the previous corresponding period. Reduced demand from certain industries due to COVID‐19 impacted overall revenue.
• Operating earnings stood at USD 5.1 million, against USD 2.8 million in Q3 2019. Lower SG&A expenses, coupled with lower other expenses, help the company to report healthy operating earnings.
• In Q3 2020, net income registered a healthy growth to USD 2.7 million, against USD 1 million in the previous corresponding period. The rise in net income was mainly due to lower operating expenses and lower income tax expenses. 

Risks associated with investment 

There are many risk factors which may limit the group’s ability to execute its strategy to achieve long‐term growth objectives. Some of the risks are International Trade Regulations, environmental regulations, Competition, Commodity Price, low order booking, Currency fluctuations etc. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company posted strong results in the third quarter of 2020, achieving an improvement in gross margin to 31.3% and Adjusted EBITDA of USD7.7 million or 19.4% of revenue despite a globally challenging business environment due to the current pandemic. The improved earnings and higher margins were supported by a shift in product mix away from commodities to higher value‐added products. Recently, the company secured multi-year contracts within Electronic Materials segments, more precisely in the Renewable Energy Sector. The renewal of these contracts is expected to improve the backlog and bookings significantly and will be reflected in the fourth quarter 2020 reporting period. Furthermore, the Company maintains its guidance of USD 25 million to USD 28 million of Adjusted EBITDA for 2020. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 3.91 on February 11, 2021. We have used industry median multiple for the valuation purpose.

Source: Refinitiv (Thomson Reuters)

Photon Control Inc.

Photon Control Inc. (TSX: PHO) manufactures fiber optic process monitoring systems for the semiconductor industry.

Key Updates:

• Strong Bullish Indicators: The stock of PHO closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. The stock reported decent gains in the recent past, and appreciated ~82% and ~103%, respectively in the last nine months and one year, respectively.

         Source: Refinitiv (Thomson Reuters)

• Robust operating margins: The company posted better margins than the industry, driven by excellent operational efficiency, which is commendable. Gross margin, EBITDA margin and operating margin in Q3FY20 stood 62.5%, 39.1% and 35.2%, respectively, as compared to the industry median of 35.3%, 10.9% and 6.9%, respectively. Notably, the company reported its net margin at 22.1%, higher than the industry median of 4.1%.

• Sequential growth: The group reported improved revenue, gross profit and net income at CAD 16.33 million, CAD 10.21 million and CAD 3.61 million in Q3FY20, as compared to CAD 16.1 million, CAD 9.72 million and CAD 2.67 million, respectively in Q2FY20. The growth is led by improved market share coupled with the client’s preferences of restocking of inventory due to COVID-19.

Q3FY20 Financial Highlights:

• PHO declared its quarterly results, wherein the company posted revenue of CAD 16.33 million, significantly higher than CAD 8.742 million in the previous corresponding period (pcp). The tremendous growth was led by the company’s new product offerings within the WFE market, coupled with increased market share.
• The group reported its gross profit at CAD 10.205 million, considerably higher than CAD 4.791 million in Q3FY19, thanks to the higher revenue, partially offset by higher cost of sales (CAD 6.125 million versus CAD 3.951 million in pcp). Gross profit stood higher at 62%, as compared to 55% in Q3FY19.
• PHO posted the operating income at CAD 5.752 million, grew from CAD 1.721 million in pcp, driven by higher gross profit, partially offset by higher general and administrative expense, increase in research and development and significantly higher sales and marketing.
• Net income of the company stood at CAD 3.607 million, as compared to CAD 1.487 million, a year ago.
• The company reported cash and cash equivalent of CAD 46.576 million, while total assets stood at CAD 77.347 million.                  

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk associated with investment

The products of the company are subjected to constant innovation required in order to stay afloat in the industry. Better offerings by the competitor at a lower price would lead to loss of market share and income. Moreover, constant upgradation of products would require constant capital investments and higher R&D.

Valuation Methodology (Illustrative): EV to Sales

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The group reported impressive cash flows from operation at CAD 7.012 million and CAD 16.558 million, in Q3FY20 and 9MFY20, respectively, as compared to CAD 3.818 million and an outflow of CAD 0.451 million, in Q3FY19 and 9MFY19, respectively. The company is investing in innovation and advanced product developments, which would strengthen the company’s offerings and would cater to the growing consumer needs, and eventually lead to higher market share. The major revenue is being derived from the semiconductor capital equipment market, which is prone to cyclicality. Hence, the group has opted for diversified offering, and identified several non-semiconductor markets, which has demand for the fiber optic sensing products. The above strategy would support the company’s operations during market cycles and augurs well for stable cash flows. We have valued the stock using the EV to sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Martello Technologies Group Inc, Vitalhub Corp etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 2.73 on February 11, 2021.

PHO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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