Is Xebec Canada’s top growth story?

Cleantech company Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News TSXV:XBC) remains the Canadian growth story to own, according to Ahmad Shaath, analyst for Beacon Securities, who delivered a review of Xebec’s fourth quarter results in an update to clients on Thursday.

Shaath maintained his “Buy” recommendation but dropped his target price from $7.00 to $5.00 as a result of the market pullback.

Montreal-headquartered Xebec provides gas generation, purification and filtration systems through its clean technology, industrial compressed air and gas treatment business segments.

The company released its Q4 and full-year results on Wednesday, posting record quarterly revenues of $13.6 million compared to $6.1 million a year earlier. For the full 2019, Xebec’s revenue jumped from $20.2 million to $49.3 million, and the company ended the year with $22.7 million in cash on hand.

President and CEO Kurt Sorschak called 2019 a transformative year and says 2020 will be another record one, even through the economic downturn stemming from the COVID-19 crisis.

“With our improved balance sheet, our strong order backlog, our growing quote log, our pipeline of potential acquisitions and our position as an essential business in a time of crisis, Xebec will be well able to maneuver through what will be a difficult economic environment in the year ahead. We believe that we will emerge from this crisis even stronger than we entered it,” Sorschak said in a press release.

On COVID-19, Xebec said its operations in Shanghai are back up and running, with management saying the first quarter losses in revenue will be made up over the rest of the year and in fact is calling for a doubling of its revenue in China in fiscal 2020. In Italy, the company has halted the installation on three projects for the last five weeks but is now back working on one of the three and expects the other two to resume in May.

Xebec’s operations in Canada have been deemed essential and are thus still operational, while its
California operations were shut down for one week only. Xebec’s Q4 numbers were a beat of Shaath’s forecasts for revenue and EBITDA. The company’s $13.6 million top line was ahead of Shaath’s $12.8-million estimate and the consensus $12.7 million while Xebec’s $1.9 million in adjusted EBITDA was ahead of Shaath’s $1.4 million estimate and the consensus $1.6 million. On EPS, the company’s negative $0.01 per share was below Shaath’s $0.01 forecast, driven by tax expenses and foreign exchange losses.

In his report, Shaath noted that management was maintaining its fiscal 2020 guidance and that the company’s backlog now stands at $99.3 million, up from $71.0 million at the end of Q3 2019.

“With Q4/FY19 results, XBC continued to build its track record of execution with fourth consecutive quarter of >120 per cent y/y revenue growth and double-digit EBITDA margin, and its highest quarterly EBITDA margin to date. The company remains on track for a second year of exceptional growth, despite headwinds from COVID19 pandemic. Diversification, by geography (China, Europa and North America) and by end product (RNG, Hydrogen and Industrial Air & Gas Services) enhances XBC’s risk profile,” said
Shaath.

“In addition to passing the ‘can it ramp up successfully’ question, the company continued to book new orders and delivered strong organic growth form its first acquisition (both key pillars of its growth in FY20E as well),” he said.

With the market pullback, Shaath’s revised valuation for XBC is 5.0x EV/Sales (compared to 7.0x previously), generating a target of $5.00 per share which at press time translated to a projected 12-month return of 49 per cent.