Following the release of better-than-expected fourth-quarter 2020 financial results, Canaccord Genuity anayst Yuri Lynk raised his financial expectations for Neo Performance Materials Inc., pointing to higher volumes in prices in both its Magnequench and Chemicals and Oxides segments.
On Monday, the Toronto-based rare earth metal company reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $12.3-million, down 1 per cent year-over-year but ahead of the $8.6-million projection of both Mr. Lynk and the Street. Revenue jumped 17 per cent to $110.4-million, also topping estimates due to stronger-than-anticipated performance from both its Magnequench and C&O segments.
“Results came in significantly ahead of expectations on the back of a sharp rebound in automotive and industrial end-markets driving higher volumes and prices in the MQI and C&O segments,” he said. “We believe Neo’s ability to capture higher volumes and prices speaks to its wide competitive moat and pricing power. The company is exposed to global megatrends such as the electrification of automobiles, tighter air, GHG, and wastewater emission standards, and industrial automation. A strong management team, $70-million of net cash, and a 2.0-per-cent dividend yield, only add to an already attractive investment case.”
Mr. Lynk noted Neo Performance expects the first quarter of 2021 “to come in strong” with positive trends in volumes continuing.
“However, Neo will now also be benefiting from higher rare earth prices as the increase witnessed in late 2020 accelerated in early 2021 on strong demand from the EV segment,” he said. “Thus, we increase our Q1/2021 revenue estimate to $119.0-million from $86.8-million and our EBITDA estimate to $19.2-million from $11.7-million.
“We updated our model to reflect higher volume and prices. Our 2021 EBITDA estimate goes up to $62.3 million from $45.1-million. Our 2022 EBITDA estimate now sits at $65.7-million versus $50.0-million previously. Recall, last cycle, Neo’s EBITDA peaked at $68-million in 2017. The recovery build into our estimates reflects strong underlying demand for magnetic powders from the automotive industry, particularly EVs. Furthermore, the rare earth supply agreement with Energy Fuels should drive 30 per cent more output from the rare earth separation facility in Estonia at compelling (byproduct) economics.”
Reiterating a “buy” rating for its shares, Mr. Lynk hiked his target to $25 from $20. The average on the Street is $23.50.
Elsewhere, Raymond James analyst Frederic Bastien bumped up his target to $25 from $21 with an “outperform” rating and Scotia Capital analyst Mark Neville increased his target to $26 from $20 with a “sector outperform” rating.
“Our Outperform recommendation on Neo Performance Materials is reaffirmed after [Monday’s] solid 4Q20 print showed the company capitalizing on rebounding end-market demand,” said Mr. Bastien. “With the speed of recovery much faster than projected ... we find ourselves raising our profit forecasts for 2021 and 2022 yet again.”