I have started a position in NEO. Despite some concerns about the potential emergence of a viable rare earth metals free magnets, I believe the company valuation today, which is below its cash and inventory balance makes this an asymmetric investment.
One of the things that struck me in the last earnings report is that the company has repurchased $15.5m worth of shares in Q3 alone ($16.7m since the start of the NCIB). On top of that the company has paid $10m in dividends over the last 9 months. Considering the fact that NEO’s enterprise value minus cash is a mere $215m at current levels, the amount of value being returned to shareholders is considerable.
From a valuation perspective, at $58M EBITDA in 2024 (average Canaccord and Paradigm) the company is a trading at 3.7 EBITDA multiple. This is materially lower than NEO’s average EBITDA multiple of 5.5. Most, critically, starting 2026, we will start seeing incremental EBITA from the company sintered NdFeB magnets expansion, with full ramp up expected by 2027. This expansion will take NEO’s mid-cycle EBITDA $100m, at 6 EBITDA, this will takes the shares to $13.6, a double from current level. If we include Silmet phase 2, this takes mid-cycle EBITDA to $125m, and the stock price up to $17.
What’s interesting is that investors are getting paid a sustainable dividend, and benefiting from buybacks, while the company sets the foundation for stronger growth post 2025. As such, while the stock may not move much in the next few quarters, investors will get compensated for the wait.
Finally, if the valuation continue to be this depressed, I see Hastings (which already owns 22% of NEO and backed by billionaire Andrew Forrest) taking a run at the whole company to compliment their mine to magnet strategy (slide 22:
https://www.investi.com.au/api/announcements/has/0283b996-300.pdf). Even a 100% premium for NEO from current levels would still make NEO an attractive target for Hastings.
As such between strong cash returns back to shareholders, dirt cheap valuation, strong mid-cycle growth prospects, and a potential strategic buyer in the offing, buying the stock here is a no brainer.