Xebec Adsorption gets new $4.50 target at M Partners

Industry tailwinds and a growing backlog are excellent signs for biogas company Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News TSXV:XBC), says M Partners analyst Andrew Hood, who in an update to clients on Wednesday increased his price target for XBC.

Montreal-based renewable natural gas (RNG) company Xebec announced on Wednesday $27.0 million in new orders received from US dairy farmers for six biogas upgrading plants and Xebec’s small-scale containerized Biostream system, five of which are from an LOI signed in December while the sixth is US$10 million for a large dairy project in the southern US.

“These orders confirm Xebec’s strengthening position in the US dairy market as farmers look towards solutions that are reliable and have the lowest lifecycle costs. Xebec’s visibility and credibility in the marketplace are rapidly increasing due to its ability to provide local service and support through its ‘Xebec Service Centers,’ while also providing systems that consume significantly less energy in converting biogas to RNG allowing for better project profitability,” a statement from the company read.

With the new numbers, Xebec’s backlog now stands at over $100 million plus about $26 million in awarded tenders, according to Hood, who notes that while 2019 was a strong year for the company, growth is likely to accelerate in the coming years.

Xebec completed an equity raise at the end of last year, putting its resources at over $30 million in cash, enough to allocate some for acquisitions of recurring revenue service businesses in Canada and the US and to fulfill its backlog and establish its Build Own Operate segment, according to Hood.

“We believe it is prudent to update our target price on Xebec amidst the perfect storm of a shift towards environmental, social and governance (ESG) investing and accelerating government/corporate support for renewable energy. We continue to view Xebec as one of the most attractive pure-play investments on renewable energy, and particularly renewable natural gas, which is poised for explosive growth over the foreseeable future,” Hood wrote.

The analyst pointed to news over the past few weeks supporting a “shifting financial landscape,” including a statement from investment giant BlackRock saying that sustainability is now at the centre of its investment approach and Microsoft’s pledge to become carbon negative and to establish a $1-billion Climate Innovation Fund.

At the same time, RNG is gaining prominence on its own, says Hood, with UPS announcing last week supply agreements for up to 80 million gallon equivalents of RNG and $450 million in expenditures on alternative fuel vehicles and infrastructure, as well as a Colorado Senate Bill in late January requiring its Public Utilities Commission to create an RNG program targeting five per cent of gas purchased for retail sale by 2025, ten per cent by 2030 and 15 per cent after 2035.

With the update, Hood maintained his “Buy” rating and upping his target from $3.20 to $4.50 per share, based on an 18.0x 2021 EBITDA estimate (up from 18.0x 2020 EBITDA) and representing at press time a return of 16 per cent.

“In our view, [XBC’s] premium to industrial compression/purification peers is justified considering Xebec’s phenomenal growth opportunities, pure exposure to clean energy and potential for earnings surprises far above our estimates for 2021,” Hood wrote.