H2O Innovation is undervalued, says Haywood Securities

The growing global demand for water treatment solutions puts H2O Innovation (H2O Innovation Stock Quote, Chart, News: TSXV:HEO) in an enviable spot, says Haywood Securities analyst Pardeep Sangha.

In a research report to clients today, Sangha initiated coverage of H2O Innovation with a “Buy” rating and a one-year price target of $2.00, implying a return of 39.9 per cent at the time of publication.

Founded in 2000, Quebec City-based H2O designs, manufactures and commissions customized integrated water treatment systems and has a line of specialty products.

Sangha notes that H2O has been an active consolidator in its space, with ten acquisitions in the $2-million to $25-million range. He says these pickups have removed the lumpiness from its revenue and provided it with a steady stream of recurring revenue. The analyst says there are strong macro drivers backing the company.

“There are over 24,000 municipalities in North America, many of whom lack modernized water treatment facilities, leaving numerous lives susceptible to water-born illnesses. We believe H2O is well positioned to take advantage of the increased water infrastructure spending over the coming years,” he says.

Sangha says H2O is responding to the challenge of the market.

“We like H2O because of the growing global demand for water treatment solutions, and the company has a visible trajectory to both organic and acquisitive growth with increasing recurring revenue and improving profitability going forward,” says the analyst. “Furthermore, H2O’s backlog is now the strongest in the company’s history.”

Sangha thinks H2O will generate EBITDA of $2.2-million on revenue of $82.5-million in fiscal 2017. He expects those numbers will improve to EBITDA of $4.9-million on a topline of $94.9-million the following year.