M Partners analyst John Safrance cuts target on 5N Plus

The headquarters of St. Laurent, Quebec’s 5N Plus. M Partners analyst John Safrance says the company’s most recent quarter underscores the volatile nature of its business, which he says is driven by the sometimes rapid changes to underlying commodity prices. On Tuesday, 5N Plus (TSX:VNP) reported its Q2, 2012 results. Revenue increased by 15% to $140.1-million compared to the $122-million the company posted in the same period last year. The bottom line news wasn’t as good though, as the company lost $21.9-million or $.29 cents a share versus last year’s net earnings of $8.5-million or $.14 cents a share.

5N Plus CEO Jacques L’Ecuyer said: “We saw relatively strong demand for most of our products during the quarter which enabled us to continue reducing working capital and debt levels through significant cash flow generation.” However, added L’Ecuyer: “…the quarter was characterized by sharp decreases in the prices of almost all of our underlying commodities, especially in the back-end of the quarter, which led to decreases in average selling prices and further impairment charges on our inventories at the end of the quarter.”

M Partners analyst John Safrance says the numbers from 5N Plus were disappointing. He says the quarter underscores the volatile nature of 5N Plus’s business, which he says is driven by the sometimes rapid changes to underlying commodity prices. In a research update to clients today, Safrance maintained his BUY recommendation on 5N Plus, but lowered his target to $2.65 from his previous target of $5.75.

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St. Laurent, Quebec’s 5N Plus, which derives its name from the purity of its products, 99.999% (five nines) took off when the 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, it was being supplied cadmium telluride cells by 5N Plus.

5N Plus, meanwhile, was mirroring First Solar’s action, albeit on a much smaller scale. Sales increased from $10.3 million for the fiscal year ended May 31, 2005 to over $181 million in fiscal 2011. That moved shares of the company from a 2008 low of $3.50 to a high of $9.85 in March of last year, but since that time the stock’s price has fallen below its 2008 levels.

5N Plus’ topline has been helped by last April’s acquisition of Belgium’s MCP Group, which was one of the world’s leading producers of specialty metals such as bismuth, gallium, indium, selenium and tellurium. The acquisition, which cost just over $315 million, dramatically increased 5N’s scale, but the company is clearly having trouble digesting the pickup amid the current tumult in the solar business. Management said adding MCP exposed it to greater seasonality.

Safrance says he expects 5N Plus will generate approximately $5 million in EBITDA per quarter solely from sales to First Solar. However, he says, this most recent quarter did not qualify as a reworked supply contract supplanted a previous arrangement. The M Partners analyst says he expects things will normalize by the fourth quarter of this year.

Shares of 5N Plus closed today down 4.2% to $1.82.

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