Buy H2O Innovation for a 150% gain, Haywood says

Following the company’s first quarter results, Haywood Securities analyst Pardeep Sangha remains bullish on H2O Innovation (H2O Innovation Stock Quote, Chart TSXV:HEO).

On Tuesday, HEO reported its Q1, 2019 results. The company lost $323,469 on revenue of $24.4-million, a topline that was up 7.7 per cent over the same period last year.

“The overall business has never been is such a good shape and well positioned to continue its sustained organic growth while improving more rapidly its profitability, CEO Frederic Dugre said. “Our record combined backlog of $153.0 M, announced on October 30, 2018, contained multiple O&M long-term contracts with synergies and a greater number of wastewater and industrial-related projects. Added to our high margin Specialty Products business pillar, we are committed to improve our gross profit margin and adjusted EBITDA as the first quarter results are showing it.”

Sangha says he sees a number of positives in this quarter, including an EBITDA beat, improving margins and a growing order backlog.

“We like H2O because of its improving profitability and size of the Company’s backlog,” the analyst said. “H2O is experiencing growth across its businesses and we believe the Company’s improving EBITDA margins will lead to share price appreciation.”

In a research update to clients today, Sangha maintained his “Buy” rating and one-year price target of $2.25 on H2O Innovation.

Sangha thinks HEO will post Adjusted EBITDA of $6.8-million on revenue of $113.0-million in fiscal 2019. He expects those numbers will improve to EBITDA of $9.7-million on a topline of $127.0-million the following year.

“We believe H2O is undervalued,” the analyst adds. “H2O is currently trading at a 0.5x EV/Revenue multiple of our CY19 estimates, which is lower than its peer group average of 1.6x EV/Revenue. Our target price is a 1.0x EV/Revenue multiple of our FY19 forecast.”