Xebec Adsorption gets new $2.60 price target at Paradigm

A record third quarter and a growing backlog are good signs for high-flying clean tech company Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News TSXV:XBC), says Paradigm Capital analyst Jason Tucker, who reviewed Xebec’s latest financials in an update to clients on Wednesday and raised his price target on the stock.

Montreal-based Xebec, a compressed air and gas generation and purification systems business, reported its Q3 2019 on Tuesday, featuring record revenues of $13.2 million, a 136 per cent increase year-over-year, and positive EBITDA of $1.5 million, up from $0.1 million a year earlier.

President and CEO Kurt Sorschak commented on the quarter as representative of the company’s executing according to its growth strategy, saying,

“With strong and balanced growth in Europe, North America and China we are also benefitting from our global presence and associated market exposure. I am also excited about our activities in the gasification, carbon capture and hydrogen markets and we expect to discuss more about these opportunities in the coming quarters”. Operationally, we are making progress in establishing a strong supply chain to support our growth and we expect this to be a focus in the coming year leading to improved lead times and higher margins for our products,” Sorschak said in a press release.

Xebec’s quarter came in ahead of Tucker’s estimates, which were calling for revenue of $10.3 million and EBITDA of $1.1 million. The analyst noted that the higher top line was due to strong capital equipment sales while the contribution from Xebec’s Industrial Service and Support segment was lower than expected.

Notable was both the company’s growing backlog, which went from $63.5 million at the end of the second quarter to $71 million by Q3’s end, and management’s guidance which increased its revenue projection for 2019 from $45 million to between $48 and $49 million.

At the same time, Tucker says that the company’s EPS guidance is now at the bottom end of its previous range, calling for between $0.06 and $0.07 per share.

“Xebec has emerged as an industry leader in pressure swing adsorption and its application to renewable gas. Xebec represents an opportunity for investors to gain exposure to the renewable energy space via a small but growing entity,” says Tucker.

“The company will look to optimize internal functions in the coming years to improve margins while integrating acquisitions into the Industrial Service and Support segment,” he writes. “Margins will also be impacted by a lower-margin contract for a landfill that is included in the current backlog. Hydrogen purification is emerging as an area of growth for 2020 and beyond, on top of the growth anticipated from RNG.”

Tucker is upping his revenue targets for fiscal 2019 and 2020, going from $46 million and $64 million, respectively, to $48 million and $88 million, respectively. On EBITDA the analyst is moving downwards, calling for fiscal 2019 EBITDA of $5.4 million (previously $6.0 million) and fiscal 2020 EBITDA of $11.4 million (previously $11.8 million).

In sum, the analyst is keeping his “Buy” rating but moving his price target from $2.20 to $2.60 per share, which at press time translated to a projected return, including dividend, of 22 per cent.

Year-to-date, XBC is currently up 180 per cent.