Analyst Pardeep S Sangha ofHaywood Securities sees H2O Innovation Inc. (H2O Innovation Stock Quote, Chart TSXV:HEO) experiencing growth across the breadth of its business and thinks the company’s improving EBITDA margin will lead to share price appreciation.
In an earnings report yesterday, Sangha reiterated his “Buy” rating and $2.25 target price on HEO.
Quebec City-based H2O released its fiscal year and fourth quarter financials on Wednesday, beating the consensus on Adjusted EBITDA at $1.1 million compared to the Street’s $0.7 million and better than last year’s Q4 of $0.0 million. The company’s topline of $24.5 million came in lighter than the consensus $25.9 million.
In the press release, CEO Frédéric Dugré emphasized the company’s 20.4 per cent organic annual revenue growth along with the good-looking EBITDA growth.
“We are very pleased to see an acceleration of our EBITDA performance superior to our revenue growth, which demonstrates our scalability potential,” Dugré said. “Our focus for the coming years is still to increase our EBITDA margin by various initiatives and strategies, most of them having been implemented in fiscal year 2018. Tight projects execution, product innovations, sales network expansion, long-term customers’ retention and rigorous control on expenses will allow us to improve our EBITDA.”
Sangha said the Q4 revenue was lower than his $25.9 million estimate while beating his Adjusted EBITDA forecast of $0.7 million. The analyst highlighted both H2O’s growing backlog (currently over $140 million including recent wins and renewals) as well as its increased debt levels ($2.3 million in cash and $19.5 million in debt by the end of Q4).
“We believe H2O is undervalued,” says Sangha. “H 2 O is currently trading at a 0.6x EV/Revenue multiple of our CY19 estimate, which is lower than its industry peer group average of 1.8x EV/Revenue. In considering EV/EBITDA multiples, H2O is still ramping up its EBITDA margins post the Utility Partners acquisition, hence EV/EBITDA is not used for valuation. We believe H 2 O is undervalued due to the previously delayed projects and lower profitability metrics after the Utility Partners acquisition. However, the delayed projects are now starting to be implemented and EBITDA margins are improving, which
we believe will lead to share price appreciation.”
Sangha forecasts 15 per cent revenue growth in fiscal 2019 at $114.3 million (previously $115.5 million) and a 12 per cent revenue growth in fiscal 2020 at $128.3 million (newly introduced). For EBITDA, Sangha sees H2O generating $6.9 million in 2019 (previously $7.5 million) and $10.0 million in 2020 (newly introduced).
Sangha’s $2.25 target represents a 94 per cent return on investment as of publication date.