Buy Xebec for exposure to renewable energy space, Paradigm Capital says

Paradigm Capital’s Jason Tucker has launched coverage of cleantech company Xebec Adsorption (Xebec Adsorption Stock Quote, Chart TSX:XBC) with a “Buy” rating and 12-month target of $2.00, representing a projected return of 38 per cent at the time of publication.

In a coverage initiation on Monday, Tucker states that Xebec, which makes equipment and technology to transform gases into marketable sources of energy, was ahead of the curve when in 2009 it combined businesses with gas purification company QuestAir.

“Renewable Natural Gas (RNG) was a huge opportunity but the company was having trouble capturing attention,” says Tucker. “Xebec saw what was unfolding in the German market but was years ahead of other governments and industry.”

“However, the rest of the world is finally catching up. The market for RNG is growing exponentially and Xebec is at the forefront with its offerings to address this growing demand. The company’s backlog reflects the recent surge in activity and shift in mindset,” he says.

The analyst notes that Xebec’s clean technology segment now has an order backlog of about $71 million, up from $10.6 million at the end of 2017, with a current sales activity pipeline of over $500 million. He underlines that the company has roughly nine per cent of the Canadian market for adsorption systems but hopes to be capturing 30 to 40 per cent by 2020, with EBITDA margins in the range of 17 to 20 per cent and $10 to $12 million in recurring revenue from this segment.

“Xebec represents an opportunity for investors to gain exposure to the renewable energy space via a small but growing entity. The company’s performance record with over 200 gas installations globally and ~$60 million of investments in proprietary technology give us every confidence Xebec will emerge as a leader in the growing market for RNG,” says Tucker.

The analyst predicts that XBC will generate fiscal 2019 revenue and EBITDA of $53 million and $5.9 million, respectively, and fiscal 2020 revenue and EBITDA of $61 million and $8.5 million, respectively.