The approximately $8.9-million purchase was made in conjunction with a bought deal financing round of subscription receipts for gross proceeds of $13.1 million at $0.83 per share, which Sangha calls a fair price. Hays Utility will add its 41 customers and provide cross-selling opportunities for H2O.
As a result, the analyst is raising his forecasts but keeping his target where it is due to share dilution. He’s now calling for fiscal 2019 revenue of $120.1 million (previously $113.0 million) and Adjusted EBITDA of $7.5 million (previously $6.8 million). For fiscal 2020, he’s calling for revenue of $141.1 million (previously $127.0 million) and Adjusted EBITDA of $11.1 million (previously $9.7 million), with an improved EBITDA margin from 4.1 per cent in fiscal 2018 to 6.2 per cent in fiscal 2019 and 7.8 per cent in fiscal 2020.
“H2O is currently trading at a 0.5x EV/Revenue and 6.5x EV/EBITDA multiples of our CY19 estimates, which are lower than its industry peer group average of 1.5x EV/Revenue and 8.0x EV/EBITDA,” says Sangha in a client update on Monday.
“We believe H2O is undervalued due to the previously delayed projects and lower profitability metrics after the Utility Partners acquisition. However, the delayed projects are now being implemented and EBITDA margins are improving, which we believe will lead to share price appreciation,” he says.
As for catalysts, Sangha points to: (1) revenue boost in Q2 from maple business; (2) winning new O&M contracts and converting backlog into revenue throughout FY19; (3) improving EBITDA margins in FY19 and FY20; and (4) integration of Hays acquisition.
Sangha is maintaining his “Buy” rating and $2.25 target, which represents a projected 12-month return of 150 per cent at the time of publication.
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