Neo Performance Materials maintains its magnetic attraction: Paradigm Capital

Things are still looking up for Neo Performance Materials Inc. (Neo Performance Materials Inc. Stock Quote, Chart, News, Analysts, Financials TSX:NEO), according to Paradigm Capital analyst J. Marvin Wolff, who maintained his ‘Buy’ rating on the company, along with his target price of $31 per share.

Wolff’s positivity surrounding the Toronto-based company, which specializes in producing neodymium permanent magnet powders, revolves around the capabilities of Neo’s executive team to nearly double the company’s EBITDA to an estimated $100 million within a period of three to five years, with $100M cash potentially in hand by year-end.

“Before the impact of the COVID-19 pandemic and the downturn in the auto sector, the company generated EBITDA in the $55–$60M range,” he said. “We are of the view that the shares offer uncommon value at these levels and should benefit from a multiple expansion along with the higher profitability as a strong participant in the EV growth curve.”

Paradigm Capital’s forecasts are slightly more optimistic than consensus estimates for 2021, with projected revenues coming in around $488.2M US, with an EBITDA of 65.6x and adjusted earnings per share at $0.94/sh, while the consensus suggests revenues of $469M and an EBITDA of 59.9x, with earnings per share resting at $0.66/sh.

For 2022, the consensus estimates are more optimistic than those of Paradigm Capital.The consensus has Neo earning approximately $477M in 2022 compared to a $440M projection from Paradigm Capital, with the consensus EBITDA projection coming in at 61x compared to 51.6x on the Paradigm Capital analysis.

Further strengthening Neo’s future outlook is the agreement with Colorado-based Energy Fuels, with the latter having recently made its first shipment of Rare Earth Carbonate powder from its mill in White Mesa, Utah, to Neo’s Silmet facility in Estonia, establishing the first intercontinental rare earth supply link between North America and Europe.

“While NEO has been a profitable but quiet stock, we believe the growth trajectory warrants our valuation…”

“The launch of this new supply chain is a real game changer for Neo and our growing customer base in Europe,” said Constantine Karayannopoulos, Neo’s Chief Executive Officer in a July 7 press release. “This innovative U.S.-to-Europe supply chain will supplement Neo’s existing rare earth supply from our long-time Russian supplier. It will enable Neo to expand value-added rare earth production in Estonia to meet growing demand in Europe for these materials. It begins to unlock the extraordinary economic and environmental potential presented by utilizing low-cost rare earth feedstock from monazite ore that is a byproduct of existing mining. And, it helps Neo ramp up rare earth production in Estonia just as Europe accelerates vehicle electrification and other initiatives aimed at mitigating climate impacts.”

The contract adds an additional 300 tonnes of Real Earth Carbonate to the Silimet facility, bringing its production capacity to 2,800 tonnes per acre, resting just below its production capacity of 3,000 tpa.

The company is also significantly benefiting from a strong market value for neodymium, as its average price was approximately $120/kg in Q2, slightly down from its $140/kg valuation in April, but still significantly higher than the $70/kg value it had in late 2020.

“While down from the peak, prices are much elevated from a year ago (almost double),” he noted. “Current prices are in a sweet spot where profitability for NEO remains high but customers are not considering substitution.”

Neo is also in a unique position to capitalize on growing demand in multiple sectors, particularly in electric vehicles, where the company could potentially make as much as $165 per EV produced, compared to $10-$15 per traditional ICE vehicle.

Additionally, with its positioning as the only rare earth processing plant in Europe, Wolff suggests Neo is in prime position to capitalize on European demand for sourcing traction motor magnets within electric vehicles throughout the continent.

Wolff remains confident in Neo’s attractiveness as a stock option, believing the company has an opportunity to make some more noise in the near future.

“While NEO has been a profitable but quiet stock, we believe the growth trajectory warrants our valuation,” he said. “We maintain our EBITDA multiple of 12x and our discount rate of 8%. Using EBITDA of US$100M (unchanged) in 2025 we arrive at our target of C$31.00. The EV traction motor opportunity could see revenue, EBITDA and EPS almost double our forecast.”

Neo Performance Materials closed at $16.56/share on the Toronto Stock Exchange on Monday, a 2.3 per cent increase from the opening bell.