YB new stock pitches (Fri, Apr 11)

DN Automotive Corporation (007340.KS), a Korean manufacturer of vehicle vibration management systems and machine tools, is currently trading at a depressed valuation of 3.1x TTM P/E despite robust cash flows and improving margins. The company is planning to spin off its subsidiary DN Solutions, Korea's largest machine tools producer, in an IPO expected in May 2025. Early indications suggest the IPO could value the machine tools division at up to 2x the current enterprise value of the entire business, offering investors a substantial premium to DN Automotive's current valuation and a free option on the company's automotive parts business. Blue Orca, who is long on DN Automotive, believes this spin-off presents a unique opportunity with 3-4x upside potential on a near-term, defined catalyst. The company's low valuation is attributed to cyclical headwinds in the automotive supply and machine tools industries, as well as a lack of awareness of its under-the-radar business in the Korean stock market, which Blue Orca sees as an underappreciated Asian powerhouse with numerous small to mid-cap companies trading at excessively low valuations.

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Neo Performance Materials (NEO.TO) is a strategic rare earth processor trading at 3.2x EBITDA with a 5% dividend yield. The company, with assets outside China, has improved operations under new CEO Rahim Suleman, who sold underperforming assets and tightened operations. Two major capex projects totaling $125 million are nearing completion, expected to add $20+ million in EBITDA. A strategic review is ongoing, potentially leading to a sale. The company's unique downstream processing capabilities make it a valuable asset in the rare earth industry, especially given China's dominance in the sector. NEO has significant upside potential in case of a China-West trade war, as evidenced by a 7x EBITDA increase during a similar situation in 2010-11. Risks include the rare metals segment over-earning, potential failure of the strategic review, and economic downturn without trade tensions. Valuation targets range from $15 to $30 per share in the base case, with potential for much higher valuations in a trade war scenario.

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TechPrecision Corporation (TPCS), a defense subcontractor trading at 3x normalized free cash flow, offers exposure to 30 years of submarine and military aircraft demand. The company's Ranor subsidiary (91% sole-source) serves the Navy, while Stadco focuses on military aircraft. Following a proxy fight, a new board has been installed to address past missteps and refocus operations. With a $7.69 price target (155% upside, 35% IRR) based on achieving 70% of forecasts and applying an 11x EV/EBITDA multiple, TPCS presents an attractive opportunity. The company's four main programs (Virginia and Columbia class submarines, CH-53K helicopter, and F-15EX fighter) provide a strong foundation for future earnings. Risks include microcap status, current debt default, and program delays. Catalysts include improved free cash flow generation and a pickup in naval production schedules.

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