Beacon Securities Update & Upgrade Target $8.00 from $6.00Investors are Finally Paying Attention, Long-Term Value Point to 4x Potential Return
September 27, 2021 Ahmad Shaath, CFA, MBA (416) 507-3964 ashaath@beaconsecurities.ca
NanoXplore reported Q4 and FY21 results that we consider a non-event as it included minimal contribution from the graphene business, the main value driver behind our thesis. Looking ahead, the company remains in active discussions with more than a handful of potential clients, where we expect announcements before the end of the year. Volume expectations based on conversations with current and prospective customers indicate a significant ramp starting in CY23, where 3rd module is expected to be built. We adjusted our forecasts accordingly, and moved our valuation base to CY25E EBITDA, where we now use 25x multiple (vs 20x previously), discounted at 5% (unchanged) to CY22E to arrive at our new TP of $8.00. We maintain our BUY recommendation.
Q4/FY21E Results A Non-Event. NanoXplore reported Q4/FY21E total revenue of $20.9 million, ahead of our $18.0 million forecast and consensus $20.6 million. Revenue for the quarter included ~$1.3 million in other income, largely from COVID-19 government relief subsidy. The results included insignificant amount of graphene sales and continued to be impacted by the weakness in the truck market given the ongoing chip shortage. NanoXplore reported adjusted EBITDA loss of ~$2.0 million, inline with our forecasts but lower than consensus expectations of a loss of $0.4 million. Gross margins came in just shy of our forecasts and SG&A costs were ~$1.3 million higher than our forecasts, which combined to offset the higher revenue vs our forecasts. The company reported EPS (diluted) of -$0.02.
Active Discussions Expected To Yield At Least One More Significant Customer. The company’s sales pipeline remains very active with ongoing discussions with more than a handful of clients. The end verticals are diversified but remain largely within the overall expertise that GRA has been building over the years in the auto, infrastructure/construction, and agriculture industries. Management indicated discussions are at advanced stages and we should expect the company to announce new wins before the end of CY21E.
Multiple Catalysts to Come as Investors Start to Realize the Potential Bluesky in GRA. NanoXplore will be commissioning the demo plant for VoltaXplore in Q1/CY21, with work completed so far inline with expectations. Catalysts could potentially come earlier in the form of additional partners joining the JV and awards of government grants. GRA is also looking to conclude further acquisitions to expand into new verticals and/or add manufacturing capabilities. The main driver over the short-term should be new sales agreement given the robust sales pipeline. The recent agreement with Gerdau represented an inflection point for GRA shares, which continued to make new all-time highs in a sign that a wider investor base is finally recognizing the bluesky potential in NanoXplore. To that end, we continue to point to our DCF valuation which yields a fair value per share of $26.50 (vs $23.50 previously). Our assumptions are reasonable, with 2 modules fully ramped in CY23 and a 3rd module in CY25 for a total of 12,000 tpa. Profitability wise, we expect EBITDA margins to peak at ~26% based on long-term ASP of $12 per kg. Our terminal value assumptions are also reasonable, with 2.5% terminal growth rate/10x EBITDA exit multiple and 10% WACC. Our DCF analysis doesn’t reflect upside from VoltaXplore or additional acquisitions, and we model $20 million capex per module. For our TP calculation, we utilize a 25x EBITDA multiple (vs. 20x previously) to the first year of full-run rate of production from 3 modules (CY25E), discounted to CY22E at 5%.
This approach yields $8.00 per share. BUY