Xebec Adsorption is poised for greatness, this fund manager says

Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News TSX:XBC) has been pummeled in recent weeks but investors should hold tight, says portfolio manager Robert McWhirter, who claims the two-year horizon for the stock still looks great.

Montreal-based Xebec, which provides renewable gas services (generation, purification and filtration) rode a wave of support in the latter half of 2019 and into 2020 as the company saw its order backlog fill up and, on a broader scale, investors took to buying renewable energy companies in spades.

Xebec started 2019 at $0.75 per share and finished at $2.15, enough for a 187-per-cent return. Then the floodgates really opened in January and February where the stock rose to as high as $4.52 by mid-February.

We all know what happened since then, though, with markets taking their worst hits in decades and RNG companies like Xebec not escaping the punishment. XBC has now lost all the gains it made since the start of the year.

But yesterday, on a day when the S&P/TSX Composite lost 9.9 per cent, Xebec ended the day up 15.5 per cent on news that the company’s operations in Shanghai, which had been shuttered for weeks due to the COVID-19 outbreak in China, were now restarted and “fully operational,” according to management.

“We have been dealing with the novel coronavirus since its first outbreak in China 12 weeks ago,” said Kurt Sorschak, Xebec’s president and CEO, in the press release. “This has led Xebec to prepare for a similar situation in North America and we are in the fortunate situation to have all necessary protocols in place to continue operating in this challenging environment.”

McWhirter says that’s good news for Xebec.

“The concern was that about ten per cent of Xebec’s sales were in hydrogen in China. That business was expected to grow by 3x in 2020 to become 20 per cent of their business. So, overall, it looks like everybody’s back to work,” said McWhirter, president of Selective Asset Management, speaking to BNN Bloomberg on Monday.

“I did the numbers and it’s trading at a reasonable price to earnings multiple. Earnings are expected to grow by 100 per cent this year and a further 50 per cent next year. If that’s the case, the stock is trading at $2.00 at a 12x P/E multiple based on 2021. I think that in spite of all the chaos in the marketplace, there’s still a good opportunity,” he says. McWhirter said Xebec is expected to get a number of contracts in Canada and has potential to wrap up some pretty big wins in the near future.

“Remember, Xebec’s backlog is significant, about $75 million, and they are in the process of bidding on a book of business that’s in excess of three-quarters of a billion dollars, ten times a bigger opportunity than what the company’s expected sales are this year,” McWhirter said.

“Overall, great products and a continuation of the need for climate change in spite of the concerns around COVID-19,” he said. “I think that when you look at an investing time frame of two years or less I think you will be very happy with the results of what Xebec can produce.”

Disclaimer: Robert McWhirter owns shares of Xebec Adsorption.