Xebec Adsorption is a little too pricey right now, says M Partners

In an update to clients on Wednesday, Piotrowski moved his rating from “Buy” to “Hold” while nonetheless upping his target price from $5.00 to $6.00. Xebec, which offers gas generation, purification and filtration solutions for the industrial, energy and renewables sectors, has seen its share price rise in 2020, climbing 148 per cent year-to-date, which came after gaining 195 per cent in 2019. XBC is up over 30 per cent this October, alone.

Piotrowski said clean energy is getting a boost in its business from governments, utilities and other companies. On October 1, Canada’s federal government committed $10 billion in spending through the Canada Infrastructure Bank, with $2.5 billion of that being allocated to renewable energy projects, while in the United States, presidential candidate Joe Biden has promised trillions of dollars in clean energy spending.

Piotrowski said he’s optimistic about Xebec’s long-term revenue drivers but he currently pegs its value at 18.9x 2022 EBITDA versus its Industrial machinery and Cleantech peers at 10.1x.

Piotrowski wrote, “While we continue to view Xebec as one of the most attractive pure-play investments on renewable energy, and particularly renewable natural gas (RNG), we believe at current valuations it is prudent for investors to remain on the sidelines as we await further developments from the Company.”

Montreal-based Xebec last released quarterly numbers on August 11 where its second quarter 2020 featured revenue of $19.6 million compared to $12.8 million a year earlier and an EBITDA loss of $0.1 million compared to positive $1.8 million a year earlier. In its quarterly comments, management kept its broader market outlook along with its 2020 revenue guidance of between $80 million and $90 million, but Xebec pulled its earnings and EBITDA guidance, referencing uncertainties surrounding COVID-19.

Piotrowski said XBC’s gross margins will be one to watch. “Concerns are largely focused on the delivery of Cleantech orders, the next set of which have U.S. exposure and hence greater COVID risk. Gross margins in this segment have tightened to 25-30 per cent versus 30 per cent previously expected. However, we do remain confident in management’s ability to drive margin improvement back to recent highs with product
standardization efforts and cost structure improvements,” he wrote.

The analyst’s updated forecast calls for fiscal 2020 revenue and EBITDA of $89.6 million and $8.4 million, respectively, and for fiscal 2021 revenue and EBITDA of $135.3 million and $20.3 million, respectively.

His new target of $6.00 represented at press time a projected one-year return of nine per cent.

Looking ahead, Piotrowski said catalysts for Xebec include further Industrial acquisitions, developments in the company’s “Build, Own and Operate” (BOO) segment and new orders, with the analyst saying he will revisit his target and rating in the event of any of these catalysts or further commentary from management on margin improvement.

“We expect to revisit our target price and rating on Xebec in the event of any of the aforementioned catalysts, as well as any commentary on margin improvement,” he said. “Following the Q2 release, management retracted prior earnings and EBITDA guidance due to COVID uncertainty. Management had previously guided for 11-13% EBITDA margins. Concerns are largely focused on the delivery of Cleantech orders, the next set of which have U.S. exposure and hence greater COVID risk. Gross margins in this segment have tightened to 25-30% vs. 30% previously expected. However, we do remain confident in management’s ability to drive margin improvement back to recent highs with product standardization efforts and cost structure improvements.

On October 1, Canadian Prime Minister Justin Trudeau announced $10-billion in new infrastructure initiatives, including $2.5-billion for clean power, through the The Canada Infrastructure Bank’s (CIB) Growth Plan.

“Today’s announcement is part of the government’s campaign to create over one million jobs to rebuild from the pandemic, and our more than $180 billion commitment to invest in new infrastructure across Canada,” read the press release from the Prime Minister’s office. “The government will continue to focus on making investments to strengthen the middle class, create new jobs, and grow the economy, as we work together to fight COVID-19 and build a more resilient Canada. Together, we can create a Canada that is healthier and safer, cleaner and more competitive, and fairer and more inclusive for future generations.”

“Canada’s infrastructure plan invests in thousands of projects, creates jobs across the country, and builds stronger communities. The Canada Infrastructure Bank is critical to expanding Canada’s ambition by bringing in the private sector to get more infrastructure built. The Bank’s $10-billion Growth Plan, focused on investments in broadband, clean energy, retrofits and agricultural irrigation, will create 60,000 jobs, grow the economy and help build a low-carbon future,” added Catherine McKenna, Minister of Infrastructure and Communities.