Velan (TSX:VLN) recently caught the attention of investors, surging in share price by 30% this week on stellar third-quarter results. This dramatic rise reflects market confidence in the company’s strategic direction and recent financial performance. Let’s dive deeper into its earnings, past performance, future outlook, and whether the stock deserves its current momentum or not.
Into earnings
Velan reported sales of $73.4 million in the third quarter (Q3), an 18.1% year-over-year increase driven by strong shipments from its Italian operations for oil and gas markets and the petrochemical sector in China. The gross profit soared to $28.3 million, or 38.6% of sales, compared to $8.2 million (13.1% of sales) last year, reflecting efficiency gains, a favourable product mix, and reduced exposure to problematic contracts.
Adjusted net income from continuing operations reached $8.5 million or $0.39 per share, a stark improvement from a $7.0 million adjusted net loss of $0.32 per share in Q3 2024. This turnaround was primarily attributed to higher sales volumes and gross profit. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also jumped significantly to $14.3 million. Compared to negative $4.1 million last year, showcasing Velan’s enhanced operational efficiency.
However, the company recorded a net loss of $47.8 million, largely due to one-time restructuring costs of $74.5 million related to the divestiture of asbestos liabilities. Excluding these costs, the company’s adjusted financials demonstrate a much healthier position.
Growing strength
Velan stock’s recent announcement to divest its asbestos-related liabilities is a game-changer. By transferring its liabilities to a subsidiary and selling it to Global Risk Capital, Velan effectively removes significant legacy risks. This transaction, though expensive upfront at $143 million, clears its balance sheet of a major drag and indemnifies the company from future asbestos-related obligations.
Furthermore, Velan stock’s order backlog grew by 5.3% since the start of the fiscal year. Now reaching $298.7 million, with $249.1 million (83.4%) expected to be delivered within the next 12 months. This backlog, combined with recent nuclear energy initiatives, positions Velan stock to capitalize on global clean energy trends. Including opportunities in small modular reactors and life-extension projects for existing nuclear facilities.
Despite slightly lower bookings for the quarter to $59.1 million compared to $60.1 million last year, the nine-month total bookings of $230.5 million mark a significant 30% increase year over year. This reflects Velan stock’s growing relevance in markets like North America and Germany, though challenges remain in regions like Italy.
What to consider
Velan stock reinstated a quarterly dividend of $0.03 per share, reflecting management’s confidence in the company’s financial stability and future growth prospects. While the payout is modest, it signals a commitment to shareholder returns, with a potential for increases post-transaction closings. The company’s net cash position of $32.1 million and manageable long-term debt of $19.5 million suggest a stable financial foundation.
While Velan stock’s underlying business is improving, the stock is not without risks. The company’s restructuring costs have led to significant headline losses, which may deter risk-averse investors. The book-to-bill ratio of 0.81 for the quarter reflects a slight decline in order replenishment rates, though the nine-month ratio of 1.09 suggests strong overall demand. Investors should also monitor currency fluctuations, which have had minor but measurable impacts on the company’s financials.
Bottom line
Velan stock’s Q3 results and strategic initiatives paint a picture of a company in transition but on a promising path. The surge in gross profit, significant backlog, and targeted divestitures indicate a company strengthening its core business while addressing past liabilities. The reinstatement of a dividend adds further confidence in its trajectory.
However, Velan stock’s recent 30% surge may have already priced in much of this optimism. Investors looking for long-term growth, particularly in the clean energy sector, may find Velan stock appealing. For others, waiting for further clarity on transaction outcomes or a potential dip in share price could present a better entry point. So, Velan stock appears to be a calculated but potentially rewarding buy for investors comfortable with some short-term volatility — all in exchange for exposure to a turnaround story with long-term growth prospects.
