A stable pricing environment and an improved cost structure are making 5N Plus (TSX:VNP) attractive, says Laurentian Bank Securities analyst Nick Agostino.
On Tuesday, 5N Plus reported its Q4 and fiscal 2016 results. In the fourth quarter, the company posted Adjusted EBITDA of $4.34-million on revenue of $54.7-million.
“After a difficult year in 2015, 2016 was a foundational year in the company’s history,” said CEO Arjang Roshan. “During the year, we focused our efforts on realigning the overall cost structure, vetting investment opportunities, reducing inventory requirements, restructuring various contracts and reducing future volatility, especially due to metal prices. Furthermore, we adopted a new commercial approach aimed at balancing market share with quality of earnings. With the introduction of 5N21, we put more emphasis on growth initiatives. We are invigorated by the tangible progress demonstrated by our results. We expect further enhancements in 2017 and as we continue to execute our plan.”
Agostino says 5N Plus’s Q4 EBITDA of (US) $4.3-million, despite being up 300 per cent year-over-year, fell below both his and consensus estimates. He notes that the company’s Q4 topline bested his but not the street consensus estimate. But the analyst says he sees real progress being made.
“As VNP continues to execute its strategic plan, we expect further margin upside on facility consolidation (two sites consolidating in 2017, with full benefit expected in 2018) and contract renegotiation including commercial hedging (a function of pricing and contract duration and includes fixed contract pricing) to lock in margins,” he says. “Near-term, the company is targeting ROCE of 12%, and uses this level as a hurdle rate on individual contracts. This rate is expected to increase to 15% toward the tail end of VNP’s strategic plan. To this end, VNP is selectively focusing on higher margin products, exiting some midstream products with no opportunity for differentiation, and optimizing its upstream activities.”
In a research update to clients today, Agostino maintained his “Buy” rating and one-year price target of $2.75 on 5N Plus, implying a return of 57.1 per cent at the time of publication.
Agostino thinks 5N Plus will post Adjusted EBITDA of $25.5-million on revenue of $146.4-million in fiscal 2017. He expects these numbers will improve to EBITDA of $27.0-million on a topline of $151.5-million the following year.