H2O Innovation is “significantly undervalued, says Haywood

Look for H2O Innovation (H2O Innovation Stock Quote, Chart, News TSXV:HEO) to have continued growth in upcoming quarters, says Haywood Capital Markets analyst Daniel Rosenberg, who reviewed the company’s latest quarterly results in an update to clients on February 13.

Quebec City-based H2O, a wastewater treatment company, released its second quarter fiscal 2020 financials on February 12, reporting revenue of $33.3 million, up from $29.4 million a year earlier, and adjusted EBITDA of $2.3 million compared to $1.4 million a year earlier.

Over the quarter, H2O completed the $28-milion acquisition of specialty chemical provider Genesys Holdings. In its quarterly commentary, management said the results demonstrate the scalability of the company’s business model.

“Our strategy is working and our customers benefit today from a more complete and diversified offering of products and services allowing them to grow their business as a distributor or to benefit from an integrated and accountable customer care,” said Frédéric Dugré, President and CEO, in a press release.

In his review, Rosenberg noted that the quarterly revenue of $33.3 million was a slight miss of the consensus estimate of $34.1 million, while the adjusted EBITDA of 42.3 million was a little ahead of the consensus $2.0 million. Adjusted EBITDA margin for the Q2 was up to 6.9 per cent compared to 4.7 per cent a year earlier and gross margins of 24.8 per cent were up from 21.3 per cent a year earlier, which Rosenberg attributed to a better revenue mix. The new addition, Genesys, added $1.6 million in revenue for the quarter.

Rosenberg likes the company’s recent purchases of Genesys and Hays Utility, both of which he says add revenue synergies and scale and complement H2O’s existing business lines. The analyst sees a visible trajectory for organic and acquisitive growth for H2O.

“H2O is benefiting from sector tailwinds and is well positioned to take advantage of the increased water infrastructure spending over the coming years,” Rosenberg wrote. “H2O has built a robust business that is beginning to see the benefits of increasing scale, cross-division synergies, and strategic partnerships. We believe shares are significantly undervalued at these levels.”

“We believe past challenges with project delays are over, which positions the Company for elevated revenue growth and EBITDA expansion as H2O continues to bid for, and win, new contracts. Increasing profitability and cash flows will lead to a share price appreciation over the coming quarters,” he said.

The analyst also pointed to H2O’s healthy backlog as a good indication of a seasonally strong upcoming third quarter, where the company ended the Q2 with a backlog of $142.7 million compared to $153.3 million at the end of the previous quarter. Rosenberg is calling for 15 per cent growth for H2O over its fiscal 2020 followed by nine per cent growth in fiscal 2021.

Rosenberg has made minor adjustments to his estimates and is now calling for fiscal 2020 revenue and adjusted EBITDA of $135.6 million and $8.5 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $147.6 million and $11.7 million, respectively. The analyst is maintaining his “Buy” recommendation and $1.90 price target, which at press time represented a projected 12-month return of 83 per cent.