H2O Innovation gets price target raise at Haywood

It’s been a great 2020 for H2O Innovations (H2O Innovations Stock Quote, Chart, News TSXV:HEO) but there’s still more upside available, according to Haywood Capital Markets analyst Colin Healey, who reviewed the company’s quarterly numbers in an update to clients on Tuesday.

Healey reiterated his “Buy” recommendation and lifted his target price from $2.25 to $2.50, saying the stock is undervalued considering H2O’s increasing profitability and cash flows.

Quebec City-based H2O Innovation designs, manufactures and commissions customized integrated water treatment solutions based on membrane filtration technology and has a complete line of specialty products. The company released its first quarter fiscal 2021 financials on Tuesday, showing year-over-year revenue growth of 24 per cent to $35.0 million, with a gross profit margin before depreciation and amortization expenses of 27.1 per cent compared to 23.8 per cent a year earlier. Adjusted EBITDA doubled to $3.5 million compared to $1.6 million a year ago.

“As we continue to grow our revenues organically and through acquisitions, we are enjoying margin expansion of our gross profit and adjusted EBITDA concurrently, which translate into an increasing net earnings of $1.0 million for the first quarter – a record-high quarterly performance for the Corporation,” said president and CEO Frédéric Dugré in a press release.

Dugré said management’s focus on recurring revenues is bearing fruit and giving H2O financial stability during the current COVID-inspired economic upheaval.

“Despite the on-going pandemic, the water sector remains resilient and essential to our day-to-day. In addition, our business model is robust and our financial situation is strong, allowing us to envision the coming fiscal year with confidence and with the ability to complete other potential acquisitions of Specialty Products and O&M businesses,” said Dugré.

Healey called the quarter a solid start to the new fiscal year for H2O, with all of the company’s financial metrics now tracking positively. In particular, the analyst noted recurring sales which now make up just over 90 per cent of revenue, up from 80 per cent a year earlier.

As well, the company has industry momentum on its side, Healey says. “H2O is benefitting from sector tailwinds and is well positioned to take advantage of the increased water infrastructure spending over the coming years,” Healey wrote.

“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,” Healey said.

By the numbers, H2O’s $35-million topline was in line with Healey’s $34.8-million estimate and the consensus $34.1 million and the adjusted EBITDA of $3.5 million was better than Healey’s $2.6 million and the Street’s $2.5 million. By business segment, H2O hit $11.4 million in revenue from Specialty Products & Services, up 119 per cent year-over-year, $6.2 million in Projects and Aftermarket, down 24 per cent year-over-year, and $17.4 million in Operations and Maintenance, up 17 per cent year-over-year.

On the M&A front, H2O’s recent history has it acquiring Texas Operations and Maintenance (O&M) company Hays Utility South for $8.9 million, then last year acquired UK-based water treatment business Genesys Holding for $28 million, followed by another Texas O&M business, Gulf Utility Service in July of 2020 for about $3.7 million.

Healey likes the recent buys of Genesys and Hays, saying they provide revenue synergies, add scale and complement H2O’s existing business lines.

After a few years of slumping share price, H2O has picked it up in 2020, currently trading up about 90 per cent year-to-date. But Healey thinks there’s more where that came from, with the analyst projecting ten-per-cent revenue growth for the 2021 fiscal year.

“We see this as an attractive entry point for investors. H2O is currently trading at a 1.2x EV/Revenue multiple of our calendar 2021 estimate, which is lower than its industry peer group average of 2.2x EV/Revenue. We believe H2O is undervalued given the resiliency of its business lines, large backlog and synergies it is achieving through M&A. We believe strong financial performance over the next few quarters and improving EBITDA margins will lead to share price appreciation,” Healey wrote.

Healey is calling for fiscal 2021 revenue of $147.3 million and adjusted EBITDA of $14.5 million, followed by fiscal 2022 revenue of $153.6 million and adjusted EBITDA of $15.3 million. At the time of publication, the analyst’s $2.50 target represented a projected 12-month return of 35 per cent.

Last month, H2O won the Water Company of the Year award at the 2020 Global Water Awards, which goes to the water company making “the most significant contribution to the development of the international water sector in 2019,” according to the Global Water Awards.

H2O called the award “the highest honour in the international water treatment industry” and noted that this is the first time a Canadian company won the award.

“We could not be prouder to have won this prestigious award, especially as H2O Innovation is celebrating its 20th anniversary this year,” said Dugré in a press release.