Stifel: Target: $13 - Valuation average: $17.63
We are upgrading NEO to BUY (from Hold) due to the launch of a strategic review process. This rating change is predicated upon a successful conclusion, rather than continuing on as the status quo. We have used seven different approaches to ascribe value to NEO that create a range of C$8.33/sh to C$30.46/sh, for an average of $17.63/sh. In the event of a failed strategic review process, we expect the stock fo find new lows. We are increasing our target price to C $13.00 from C$7.50 on higher 2025E target multiples of 8.0x EV/EBITDA and 20.0x P/E, versus 4.5x and 13.0x, previously. However, there is potential upside beyond this C$13.00/sh target price if the strategic review is successful.
Stifel's view: We believe the assets of NEO will be very attractive to a wide range of strategic buyers and financial sponsors as critical rare earth metals are becoming an investment strategy for private equity enterprises. NEO has approximately 50-55% market share for NdFeB powders, and has an emerging rare earth business in Europe that is likely to grow with EV production.
SOTP suggests the company is significantly undervalued: Using our 2025E estimates and the peer group averages for NEO's business segments, we arrive at a value of C$18.33/sh. We have discounted the 2029E run rate EBITDA from the company's Estonia expansion, as we believe it will be a key driver of value in any transaction. We have assumed run rate EBITDA of $15 mm in 2029E, discounted back to 2025E using a rate of 10%.
Using "close-ish" peers suggests a value of C$29.44/sh: MP Materials and Lynas are similar to NEO, albeit imperfect comps. The 2025E EV/EBITDA for MP and Lynas are 15.3x and 14.3x. Using the average of these two multiples in 2025E indicate a value of $29.44/sh. Moreover, this is a reflection of potential accretion in the event of M&A with a strategic acquirer.
More traditional valuation metrics still indicate significant potential upside: The company's average +2FY EV/EBITDA going back to late 2017 is 5.0x. This ascribes a value of C$10.29/sh for NEO including consideration for the Estonia expansion. Our current NAV (10% discount rate) ascribes a value of C$14.99/sh.
C&O separation asset sale could be an alternative: NEO's rare earth separation business has a highly volatile cash flow stream due to the lead lag impacts. We believe these could be an opportunity for NEO to improve the consistency of its cash flow through sale of its separation business. We address this opportunity in the document as it could lead to significant share price upside (e.g. +76%) if a re-rate occurs and the company can achieve a reasonable sales multiple of 6.0x EV/EBITDA.
Key risks to our thesis: The primary risk to our thesis is that nothing comes of the strategic review. If nothing transpires and the stock continues as a stand-alone entity we expect the floor for the share price will be lower than where the stock was prior to the transaction. The other key risk could be potential approvals as it pertains to any transaction given the strategic nature of many of the assets and their disperse geographic location (China, Europe, Singapore) with conflicting political goals.