Cleantech stock H2O Innovation is very undervalued, Haywood Securities says

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

This morning, H2O reported its Q2, 2019 results. The company lost $1.21-million on revenue of $29.4-million, a topline that was up 13.8 per cent over the same period last year.

“We are already seeing upsides from the acquisition of Hays in Texas completed on Dec. 1, 2018,” CEO Frederic Dugre said. “Indeed, additional revenues are impacting positively this quarter’s results and cross-selling synergies have been targeted for the coming quarters. Our $147.7-million combined backlog is not only providing visibility on revenues but is an unbelievable source of additional sales synergies generated by our multiple product lines. With proper business mix, combining projects and aftermarket, speciality products, and O&M, I am confident to see an improvement in our gross profit margin and thus our EBITDA’s performance.”

Sangha says this was a “solid” quarter, with revenue slightly ahead of consensus while Adjusted EBITDA was just below. The analyst says he believes H2O’s share price will be driven by the Hays Utility acquisition, organic growth and improving EBITDA margins.

“We like H2O because of the Company’s large backlog, increasing scale with the Hays Utility acquisition and improving EBITDA margins,” the analyst says. “We believe H2O is undervalued as the share price has not yet recovered from the low profitability metrics in 2017 and the overall weakness in capital markets in 2018.”

In a research update to clients today, Sangha maintained his “Buy” rating and one-year price target of $2.25 on H2O Innovation, implying a return of 185 per cent at the time of publication.

Sangha thinks H2O will post Adjusted EBITDA of $7.2-million on revenue of $119.6-million in fiscal 2019. He expects those numbers will impove to EBITDA of $10.5-million on a topline of $140.7-million the following year.