5N Plus Inc.

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

• Secured multi-year contracts: Recently, the company 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 its portfolio of advanced engineered materials, as desired by its customers across a broad spectrum of applications.

• Increase in cash from operating activities and cash equivalents: In FY 2020, the company generated higher cash from operating activities, which amounted to USD 36.8 million compared to USD 2.7 million in 2019. The increase in funds from operations was mainly due to higher Adjusted EBITDA and improved working capital. Cash and cash equivalents also increased by USD 19.88 million in the reported period.

Source: Company

• Steady backlog and bookings: In Q4 2020, the backlog reached 189 days of annualized revenue, higher than the previous quarter, which ended at 171 days. The net difference in backlog is primarily 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. The Bookings also reflected an improvement. 

Source: Company

• Reduced Net debts: The group’s net debt after considering cash and cash equivalents, decreased by USD 24.9 million, from USD 35.0 million on December 31, 2019 to USD 10.1 million December 31, 2020.

Source: Company

• Acquiring Azur Space: Recently, the company announced that it would be acquiring AZUR SPACE Solar Power GmbH ("AZUR"). We believe the acquisition would be a foundation of a strategic transformation to unlock the company's notable market potential. The integration would culminate in a sustainable supply chain, which would ensure the competitiveness and security of supply for its customers and government agencies. 

Financial overview of FY 2020 (In thousands of USD)

Source: Company

• In FY2020, the company reported revenue of USD 177.1 million, compared to USD 195.9 million in the previous corresponding period. Reduced demand from certain industries due to COVID‐19 impacted overall revenue.
• Operating earnings stood at USD 13.5 million, against USD 8.2 million in FY 2019. Lower cost of sales, SG&A expenses, coupled with lower other expenses, help the company to report healthy operating earnings.
• In FY2020, the net income registered a healthy growth to USD 2.1 million, against USD 1.7 million in the previous corresponding period. The rise in net income was mainly due to lower operating expenses, partially offset by higher income tax expenses.

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. 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

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

Stock recommendation

The company concluded FY2020 with strong quarterly and full-year results. Gross margin surged to 27.6% and Adjusted EBITDA increased to USD 28.8 million (16.2% of revenue), despite reduced demand from businesses impacted by COVID-19 and historically low metal notations weighing on upstream activities. The group generated USD 24.9 million of cash flow, further strengthening its balance sheet while completing a series of investments supporting its growth initiatives and enhancing operational agility. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 4.46 on April 14, 2021.

1-Year Price Chart (as on April 14, 2021). Source: Refinitiv (Thomson Reuters)

Imaflex Inc.

Imaflex Inc. (TSXV: IFX) specializes in the manufacturing and sale of polyethylene films. The company mainly sell its products to the packaging industry, including polyethylene film and bags, as well as the metallization of plastic film for the plasticulture and packaging industries.

Key Highlights 

• Inspiring Financials: The company has shown a resilient operating performance backed by a strong line-up of innovative products from the past few years. Gross margin and EBITDA margin grew from 10% and 5% in FY15 to 19.1% and 14.2% in FY 2020, respectively. 

• Innovative and proprietary solutions:The Company is developing innovative and proprietary solutions and hopes to capture a larger share of the agriculture film market due to its advanced crop protection and yield enhancement products, such as ADVASEAL®. The Management believes the value of the global addressable market for an active ingredient release film like ADVASEAL® would be much larger than that for traditional mulch films. In the U.S. alone, the Company estimates that approximately 130 million pounds of mulch film is being used, resulting in an estimated total addressable market for ADVASEAL® of approximately USD 750 million. 

Financial overview of Q4 2020 (In thousands of CAD)

Source: Company 

• In Q4 2020, the company registered a growth of 17.1% in revenue to CAD 21.9 million, against CAD 18.7 million in the previous corresponding period. The increase was driven by robust, flexible packaging sales volumes and heightened agricultural films' sales and converted products.
• Gross profit in Q4 2020 stood at CAD 4.5 million, against CAD 2.6 million in pcp. The improvement was driven mainly by the significant sales volumes, diminishing the impact of high labour and overhead costs, and by curbing the variable costs.
• On the back of higher revenue and lower finance cost, the company posted a healthy EBITDA of CAD 2.8 million, against CAD 1.4 million in Q4 2019, partially supported by lower selling and administrative expenses.
• Net income came in at CAD 1.6 million in Q4 2020, against CAD 0.3 million in pcp. Higher gross profit helped the company to post higher net income, partially offset by foreign exchange loss of CAD 0.96 million. 

Risks associated with investment

The Company is operating in a competitive industry and marketplace in which there are many participants. There are several other challenges like shortage of labour, poor revenue mix, higher input costs, which might drag the Company’s overall performance. 

Stock recommendation

The Company’s ability to develop innovative solutions while offering high-quality products and service gives it a competitive edge. Combined with its ability to take smaller orders with short lead times and at competitive prices helps the Company to create customer loyalty, which is a positive factor. Furthermore, with the recent equipment purchases, the company is anticipating increase in profitability. FY20 was pivotal year for the group, with profitability, largely due to the capital investments permitting revenue growth at a higher contribution than historical norms. The management expects the trend to continue in 2021. On the valuation front, the stock is available at a forward EV/Sales multiple of 0.7x against the industry (Containers & Packaging) median of 1.3x. Hence, considering the aforesaid rationale, we recommend a “Hold” rating in the stock at the closing price of CAD 1.1 on April 14, 2021.

1-Year Price Chart (as on April 14, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.