Cleantech stock H2O Innovation is a buy, says Beacon Securities

Water treatment services company H2O Innovation (H2O Innovation Stock Quote, Chart, News, TSXV:HEO) has been hanging out in sub-$2.00 territory for a number of years now, but the stock should be bouncing back over the next 12 months.

That’s according to Beacon Securities analyst Gabriel Leung who reviewed H2O’s latest earnings in a report to clients on Thursday, reiterating his “Buy” rating and $2.00 target price.

Quebec City’s H2O Innovation makes custom-built and integrated water treatment services for municipal, industrial and energy and natural resources end-users, with three business segments: water and wastewater projects and services, specialty products including maple equipment and products, and operation and maintenance services for water and wastewater treatment systems and utilities.

The company released its fiscal 2019 fourth quarter ended June 30 financials on Wednesday, featuring $118.0 million in revenue for the full year, an 18.4 per cent increase over 2018, and adjusted EBITDA of $7.2 million for the year, also better than the $4.1 million in EBITDA during the previous year. For the quarter, H2O generated $31.9 million in revenue and $2.3 million in EBITDA, both up from $24.5 million and $1.1 million, respectively, a year prior.

“Not only are we presenting our best year-end results boosted by a strong fourth quarter, significant cash flows from operating activities and important debt reduction, but we are also showing that our business model continue to drive more recurring sales, multiple sales synergies and accountable customer-focus offering,” said CEO Frédéric Dugré in a press release.
“As our footprint continues to grow in the United States, notably through the acquisition of Hays in Texas, but also abroad through the expansion of our distribution sales networks and the addition of new products, H2O Innovation is well positioned to address the growing and multiple needs of the water industry,” Dugré added.

The quarterly top line and EBITDA came roughly in line with Leung’s estimates, which were calling for $32.4 million in revenue and EBITDA of $2.2 million. Drilling down, Leung noted that the company’s project backlog ($127.9 million versus $121.7 million a year prior) now has a higher proportion of higher-margin wastewater projects and industrial business compared to a year ago, which the analyst says should benefit gross margins. O&M revenues of $15.9 million were markedly up from $9.8 million over the previous year, with 12.8 per cent organic revenue growth in the segment.

“We believe a combination of revenue mix, more profitable Project business, along with increasing scale within O&M were key contributors to the margin improvements. We expect additional margin improvement in FY20, although we believe the company could reinvest some of this for future growth,” writes Leung.

“Overall, we believe the fiscal Q4 results represented another positive data point with margins continuing to improve and the growth outlook in products and O&M remaining positive,” he writes.

Looking ahead, Leung thinks that H2O Innovation will generate fiscal 2020 revenue and adjusted EBITDA of $132.3 million and $8.1 million, respectively. His $2.00 target is based on a 15x multiple of his fiscal 2020 EV/EBITDA estimates and represents a projected 12-month return of 64 per cent at the time of publication.