Xebec Adsorption has 127 per cent upside, says Beacon Securities

Cleantech junior Xebec Adsorption (Xebec Adsorption Stock Quote, Chart TSXV:XBC) has taken a strategic first step on its way to becoming a national player in the industrial compressed air and gas segment, says analyst Ahmad Shaath of Beacon Securities, who on Monday reiterated his “Buy” recommendation and $1.70 target price for XBC.

Xebec announced on Monday that it has entered into an arm’s length agreement to acquire Compressed Air International, a distributor and full-service supplier of industrial compressed air and gas products, for $2.2 million.

“This acquisition will set Xebec on a path of significant growth in its industrial compressed air treatment business, while also providing future Canada-wide service, support and operations capabilities for its clean tech and renewable gas segment,” said Kurt Sorschak, Xebec’s President and CEO, in a press release.

Shaath says Compressed Air’s two locations in Guelph and Woodbridge, Ontario, the acquisition gives XBC a much-needed beachhead in the province, enabling 24-hour service to in Ontario and allowing XBC to capitalize on clean tech offerings to its Ontario client base.

The analyst says that the deal should provide immediate synergies with a ten per cent upside to both revenue and EBITDA.

“While we do like the acquisition due to its financial parameters (profitable, 70 per cent recurring revenue, financially accretive as XBC trades at 8.3x FY19E EBITDA), we believe it is more important from a strategic perspective,” says Shaath in an update to clients. “The acquisition provides XBC with its first service hub in Ontario, with two service hubs in Woodbridge and Guelph that will enable it to provide around-the-clock service to Ontario-based clients.”

Shaath says that his estimates will get updated once the transaction closes. For now, he maintains them as follows: for fiscal 2019’s revenue and Adjusted EBITDA, he predicts $39.0 million and $1.9 million, respectively, and for fiscal 2020’s revenue and Adjusted EBITDA, he predicts $50.7 million and $7.3 million, respectively.

Shaath’s $1.70 target represents a projected 12-month return of 127 per cent at the time of publication.