The fiscal first quarter numbers came in a little light but analyst Gabriel Leung of Beacon Securities likes the new acquisition closed by H2O Innovation (H2O Innovation Stock Quote, Chart, News TSXV:HEO), which will augment the company’s specialty chemical business.
In an update to clients on Monday, Leung reviewed the quarterly results and reaffirmed his “Buy” rating and $2.00 target price for HEO, which represented a projected 12-month return of 90 per cent at the time of publication.
Quebec City’s H2O reported its Q1 2020 financials last week, coming in with revenue growth of 15.8 per cent year-over-year to $28.2 million, with recurring revenues representing 80 per cent of the total. Adjusted EBITDA grew by 5.8 per cent to $1.6 million while the company’s net loss for the quarter amounted to $1.0 million. Cash flows from operating activities grew to $2.2 million for the quarter as compared to $0.7 million a year earlier, while net debt stood at $8.2 million at the quarter’s end, down from $9.8 million at the end of the previous quarter.
In his comments, president and CEO Frédéric Dugré pointed to the company’s growth-through-acquisitions strategy over the past couple of quarter, which has helped with customer retention and more cross-selling.
“Our focus to grow organically and with acquisitions in the Specialty Products and Operation & Maintenance business pillars has allowed us to increase our recurring revenues at 80 per cent and to improve our gross profit margin simultaneously to 23.8 per cent. Moreover, the acquisition of Genesys, announced earlier in November, should also allow us to further improve our margins and diversify our Specialty Products sales,” Dugré said.
The Q1 numbers came up short of Leung’s estimates, which were calling for revenue of $30.5 million and EBITDA of $1.1 million. Looking deeper, the analyst pointed to project revenues of $8.2 million which were down from $10.3 million a year earlier and O&M revenues which came in at $14.8 million, up from $9.9 million a year prior but down from $15.9 million during the previous quarter. Specialty revenues were up from $4.2 million to $5.2 million.
Aside from the quarterly numbers, H2O announced closing on the previously announced acquisition of UK-based water treatment chemical company Genesys Holdings in a $28.39-million all-cash deal. Leung notes that the deal will be funded with cash on hand, additional long-term debt of $12 million and a $22-million equity financing also completed last week.
Leung estimates that with the acquisition and pro-forma annualized, H2O will have revenues of about $135 million and about $11 million in EBITDA.
“Overall, we view the acquisition as being positive as it should be immediately accretive, adds high margin, recurring revenues, and expands HEO’s footprint in a new geography,” writes Leung.
The analyst thinks that H2O will make $10.3 million in adjusted EBITDA in fiscal 2020 on revenue of $133.8 million. His target stems from a 15x multiple of his fiscal 2020 EV/EBITDA estimates.
H2O’s share price kept falling over the first couple of months of 2019 but the stock has since made up some of that lost ground. Year-to-date, HEO is now up 12 per cent.