M Partners: The Market is Misunderstanding 5N Plus

In the recent history of Canadian tech, 5N Plus (TSX:VNP) is one of the shining successes.

A few years ago, the Montreal based company, which produces essential components of thin-film solar modules, became a primary material supplier to US cleantech giant First Solar. When First Solar’s revenue was skyrocketing they were being supplied cadmium telluride cells by 5N Plus. 5N Plus, meanwhile, was mirroring the action, albeit on a much smaller scale. Sales increased from $10.3 million for the fiscal year ended May 31, 2005 to over $178 million in fiscal 2011. This moved shares of the company from a 2008 low of $3.50 to a high of $9.85 this past March.

But shares of 5N Plus have nosedived 40% since August, to a recent low of $5.25 on November 17th. What might be puzzling to shareholders is that no negative news could be pointed to as a spark for the slide.

M Partners analyst John Safrance thinks he knows why 5N Plus is taking it on the chin, and he thinks the market is currently dead wrong in pricing the company. On Friday, in a morning note to clients, Safrance reiterated his Buy recommendation and $11.50 target and detailed his take on the possible causes behind 5N’s lacklustre market performance of late.

Safrance says there are two possible reasons for a selloff in shares of 5N Plus. The first is that most all solar equities have had a tough time recently because of a supply/demand imbalance and declining subsidies. But Safrance says 5N Plus is almost completely immune from these pressures because its contracts with First Solar are long term and stipulate quantity and pricing. On top of that, 5N’s recent acquisition of Belgium’s MCP Group means that First Solar only accounts for a small part of 5N’s revenue going forward, anyway. Safrance says 5n Plus is “no longer a proverbial one-trick-pony and should not trade solely on the boom/bust solar cycle.”

The second explanation for a selloff, says Safrance, is the perception that “rare earth metals aren’t so rare.” Safrance points out that, unlike peer Neo Materials (TSX: NEM), 5N Plus doesn’t really play in the volatile space. 5N Plus, following its acquisition of MCP Group, became one of the world’s leading producers of specialty metals such as bismuth, gallium, indium, selenium and tellurium. Safrance says that 80% of these sales are protected through pass-through mechanisms. He also says the company, unlike Neo Materials, is in the position of being able to pass the underlying commodity cost to its customers.

Shares of 5N Plus closed Friday up 9% to $5.72

About John Safrance

John Safrance is an Equities Research Analyst covering Clean Technology & Infrastructure for M Partners. M Partners is an independent full service brokerage with offices in Toronto and Vancouver, Canada serving a global list of clients worldwide. M Partners was founded in 2005. Today there are over 30 investment professionals, working in Research, Sales and Trading and Investment Banking.

M Partners focuses on delivering a high level of service and insightful research to institutional and retail clients, and providing issuer clients with innovative corporate finance and advisory services. M Partners equity research was ranked 2nd in First Coverage’s 2010 Top Performing Canadian Firms. Click here for more information.