Post by
Kanatainvestor on Nov 20, 2023 2:49pm
Stifel - November 2023
Some puts and takes, but thesis remains unchanged
We are encouraged by NEO's quarterly results, as the company's core businesses continue to recover (Magnequench and C&O). In particular, C&O performance seems to be normalizing, which we have reflected in our new estimates. However, this is offset by what is likely to be a slower ramp at Estonia whereby full production of 2,000 tonnes will not likely be achieved until late 2026E or 2027E. Our new target price of $9.00/sh (prior: $9.50), set with a 4.5x EV/EBITDA and 12.0x P/E in 2025E (prior: 5.5x and 13.0x on 2024E numbers). Our HOLD rating remains unchanged as illiquidity of the stock and volatility of the cash flow stream lead us to believe that the implied upside of 34% is not warranted to change our rating.
3Q23 results: Neo delivered 3Q23 revenue of $137 mm, which missed our estimate of $142 mm by 3% and FactSet consensus at $147 mm by 12%. The revenue miss was attributable to lower-than expected revenue generated in Rare Earth Metals, which was primarily due to lower volume than expected. Adj. EBITDA of $13 mm (margin: 9.6%) missed Stifel's forecast of $15 mm by 14% and the Street at $15 mm by 12%. EPS came in at $0.09/sh, which missed us at $0.14 and FactSet consensus at of $0.11.
Strategic updates: The company provided an update on three strategic initiatives they anticipate to occur in the next 3-6 months. This includes 1-3 MOUs with customers for rare earth magnets, 1-2 additional offtake agreements for the expanded supply of rare earths or magnetic oxides, and 1-3 changes in manufacturing footprint and operational strategies.
NCIB was active and we expect that to continue: In 3Q23, NEO repurchased 2.39 mm shares for a total of $15.5 mm. Moreover, the company repurchased another 0.2 mm of shares for $1.5 mm during October, according to SEDI. We estimate the company has used 77.8% of its NCIB which allows repurchase up to 3.59 mm of shares. In our view, the company will continue to be very active with NCIB.
Commodity prices off the lows and are in recovery mode: NdO prices have averaged US $70,998/tonne quarter to date, which is up 6% q/q but still down 25% y/y. Leading edge price is hovering around $70,000/tonne. Rare earth carbonate prices has averaged US$5,759/tonne so far this quarter, which is up 6% q/q and down 25% y/y. Leading edge REC prices are US $5,666/tonne, down 2% versus the 4Q23 average.
Capital projects update: NEO has spent $18 mm on Zibo plant relocation project and expects the capex spending to ramp up in 4Q23E with $10-20 mm spent and the remaining in 1H24E. The company also indicated that they do not expect to use the contingency of $10 mm built in the $75 mm budget. With respect to the Estonia project, management expects approximately 70% of the projected capex will be spent in 2024E. Recall, the project is estimated to cost $65-75 mm.
Estimate changes: Our 2023E estimates are largely unchanged with revenue at $573 mm, EBITDA at $47 mm and EPS at $0.01. EPS change was driven by 3Q23 EPS miss. In 2024E, key changes include updating pricing for C&O and the tonnage and margins for Rare Metals. As a result, revenue is decreased by 2% to $529 mm, EBITDA is decreased by 3% to $59 mm while EPS is decreased to $0.46 from $0.49.
Introducing 2025 estimates: We are introducing 2025 estimates with very modest increases given there is no change to the production capacity and we have kept pricing assumptions flat. As a result, we are introducing revenue of $539 mm, EBITDA of $61 mm and EPS of $0.50.