Arrowhead published an Equity Research Report on 5N Plus
September 5, 2023

5N Plus (TSX: VNP) Research Report

Highlights:

Arrowhead is updating its coverage on 5N Plus with a fair value bracket of CAD 4.2 to CAD 5.1 (share price on September 05, 2023: CAD 3.6) based on the Discounted Cash Flow (DCF) method.
In Q2 2023, the company’s revenue amounted to USD 59.1 mn, showing a decline compared with the USD 72.4 mn recorded in Q2 2022. This reduction can largely be attributed to the company’s decision to discontinue manufacturing low-margin extractive and catalytic products, a strategic move implemented in the latter half of 2022, and the related divestiture of its Tilly, Belgium, operations in Q4 2022. Adjusted Gross margin stood at 32.9%, the strongest performance in a decade. The increase was mainly attributed to the favorable product mix, strategic initiatives undertaken last year in the form of a commercial excellence program and strategic exit from the low-margin business. The EBITDA for the quarter stood at USD 17.5 mn, compared with USD 6.7 mn in Q2 2022, primarily attributed to the litigation and restructuring income of USD 9.0 mn. The Consolidated EBITDA margin stood at 29.7%, compared with 9.3% in Q2 2022. Also, the adjusted EBITDA reported during the quarter stood at USD 10.8 mn, compared with USD 8.6 mn in Q2 2022, an increase of 26.3% year-on-year (YoY), with a Consolidated Adjusted EBITDA margin of 18.4% as compared with 11.9% in Q2 2022. The Controlled cost structures helped the company post a strong bottom line, where the Selling, General, and Administrative (SG&A) expenses stood at USD 7.6 mn, compared with USD 7.4 mn in Q2 2022. This resulted in a net profit of USD 10.1 mn, compared to a net loss of USD 2.1 mn in Q2 2022. The strong financial performance helped the Company to pay down debt, with Net debt getting reduced by USD 4.9 mn since the beginning of the year and USD 6.2 mn compared with Q1 2023, resulting in a net debt of USD 73.4 mn, compared with a net debt of USD 78.3 mn reported in Q2 2022.
The revenue from the Specialty Semiconductors division stood at USD 36.3 mn, compared with USD 30.6 mn in Q2 2022, an increase of 18.5% YoY, while the adjusted gross margin for the quarter stood at 31.9%, compared with 27.7% in Q2 2022. The Performance Materials division experienced a decline in revenue due to the company’s strategic decision to exit the low-margin extractive and catalytic products in the latter half of 2022 and the sale of its Tilly, Belgium, business in Q4 2022. The revenue during Q2 2023 stood at USD 22.8 mn, compared with USD 41.7 mn in Q2 2022. However, the adjusted gross margin for the quarter stood at 36.6%, compared with 18.9% in Q2 2022.
The company stated that its ongoing capacity expansion programs have been progressing as planned and include an increase in output capacity at AZUR by 30% by 2024 and an increase in production capacity for renewable energy applications by 35% in 2023 and 100% in 2024, combined with key customer capacity expansion plans. The Company is also in the advanced stages of securing additional complex feeds and secondary streams to recover critical minerals for its recycling and refining capacity at its Montreal plant.
5N Plus has a strong outlook underpinned by unprecedented demand in target end markets (including terrestrial renewable energy and space solar power under Specialty Semiconductors and in the health and pharmaceutical sector under the Performance Material division), an improved product mix and the effectiveness of its commercial excellence program. As a leading supplier of ultra‐high-purity specialty semiconductor materials outside of China and a leader in critical metal recovery, the Company remains uniquely positioned to continue benefiting from strong demand in critical and high‐growth industry sectors, such as space solar power and terrestrial renewable energy. It has maintained its previously disclosed adjusted EBITDA guidance range of USD 35 – 40 mn for FY 2023 and a projected adjusted EBITDA range of USD 45 – 50 mn for FY 2024.
Chandrayaan-3, powered by the solar cell technology developed by 5N Plus’s subsidiary, AZUR SPACE Solar Power GmbH (“AZUR”), was employed in the latest lunar exploration mission by the Indian Space Research Organization (ISRO), where AZUR supplied the 3G30 solar cells for the propulsion module (758W), the lander (738W) and the rover (50W).