H2O Innovation has a 132 per cent upside, Beacon Securities says

Water treatment tech company H2O Innovation’s (H2O Innovation Stock Quote, Chart TSXV:HEO) new acquisition in Texas gets the thumbs up from analyst Gabriel Leung of Beacon Securities, who in a research update on Monday raised his target price from $2.00 to $2.25.

Last week, Quebec City-based H2O closed on the previously announced acquisition of water and wastewater asset management company Hays Utility South Corporation, an $8.9 million all-cash deal that the company is funding through a private placement of 15.7 million shares (~39 per cent dilution) at $0.83 per share, representing gross proceeds of $13.1 million.

Leung says the deal makes sense for a number of reasons.

“First, it bulks up HEO’s presence in Texas, which is one of the fastest growing markets for water related infrastructure in North America,” says the analyst. “Second, the inclusion of Hays adds to HEO’s recurring revenue base, which we now estimate at just under 70 per cent of total revenues, helping to provide excellent earnings visibility (at a very attractive acquisition price).”

“Third, the additional EBITDA and private placement financing helps to reduce HEO’s leverage ratios to very manageable levels. And lastly, this acquisition helps to create more synergies and cross-selling opportunities between the company’s business lines,” he says.

Leung estimates that post-transaction, H2O will have about $5 million in cash against $19.5 million in debt. He is now calling for revenues of $99.7 million, $115.5 million and $130.2 million for fiscal years 2018, 2019 and 2020, respectively, and Adjusted EBITDA of $3.9 million, $7.2 million and $9.8 million in 2018, 2019 and 2020, respectively.

The analyst gives HEO a “Buy” rating, with the $2.25 target coming from a 14x FY20e EV/EBITDA estimate and representing a projected return of 132 per cent at the time of publication.