H2O Innovation, Parkland Fuel among top picks for 2021 at Desjardins

Desjardins delivered its Diversified Industries outlook for 2021 on Thursday, saying digital healthcare, e-commerce and sustainability should be key themes for investors in the year ahead.

Desjardins analysts David Newman and Frederic Tremblay singled out WELL Heath Technologies (WELL Heath Technologies Stock Quote, Chart, News, Analysts TSX:WELL), Goodfood Market (Goodfood Market Stock Quote, Chart, News, Analysts TSX:FOOD) and Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News, Analysts TSX:XBC) as standouts in their respective fields this past year while at the same time the analysts picked Parkland Fuel (Parkland Fuel Stock Quote, Chart, News, Analysts TSX:PKI) and H2O Innovation (H2O Innovation Stock Quote, Chart, News, Analysts TSX:HEO) as its 2021 top picks in Diversified Industries.

It’s a case of more of the same, according to Desjardins, which pointed to some of the top performers in its coverage universe in 2020 as likely success stories in 2021. In order, Desjardins had WELL in first with a return of 343.6 per cent (as of December 14, 2020), followed by XBC at 243.7 per cent, FOOD at 180.5 per cent and HEO at 110.1 per cent.

Newman and Tremblay said the disruptions brought about by COVID-19 have set the stage for 2021’s move to a post-COVID reality.

“The COVID-19 pandemic has brought significant changes to many aspects of people’s lives, notably forcing consumers and businesses to adapt to a new environment characterized by strict movement restrictions and sanitary measures. This has translated into a significant acceleration of many trends that were already rising in importance over the past few years,” Newman and Tremblay wrote.

Telemedicine is a prime example. The industry ballooned in 2020 due to stay-at-home restrictions but Newman and Tremblay argue that the genie is out of the bottle and telehealth is now a permanent part of the healthcare landscape.

“Following our inaugural Desjardins Digital Healthcare Conference on November 24, 2020, we are even more certain of the secular shift toward virtual care in a post-pandemic world,” the analysts wrote. “Virtual visits have skyrocketed from less than one per cent penetration pre-pandemic to as high as 70–80 per cent during the peak of lockdowns/stay-at-home restrictions and are expected to settle at ~50 per cent of total visits in the longer term. As part of a ‘new normal’, virtual care—being one of the many elements that propels the industry toward a connected healthcare ecosystem—is here to stay, according to a majority of the leaders in digital healthcare and their customers.”

Newman and Tremblay said the consolidation-rich atmosphere in telehealth companies over 2020 (see, e.g., Teladoc’s whopping US$18.5-billion acquisition of Livongo) will continue in 2021, leaving hybrid omni-channel players like WELL Health well-positioned to scoop up digital health app providers and keep building its clinic base.

“WELL remains disciplined in its capital allocation, having been able to execute recent deals at reasonable valuations (~0.5–3.6x revenue),” the analysts wrote. “We believe the company has several advantages in this seller’s market, including its omni-channel approach, decentralized M&A strategy, ample dry powder of ~$80 million, and ability to curate and test run third- party apps on its apps.health digital marketplace.”

E-commerce has been the big story in 2020, of course, but within that sector, Newman and Tremblay pointed to grocery and food purchases as a disrupted and now permanently changed industry, where post-pandemic Canadians’ online food purchases are expected to be about 30 per cent above where they were pre-pandemic.

For that sector, the analysts gave the nod to meal kit company Goodfood.

“We continue to highlight Goodfood as an attractive way for investors to gain exposure to [the e-commerce] shift. We believe that the safe and convenient experience offered by FOOD during the pandemic, its broadening product offering (meal kits, prepared meals, groceries) and ongoing investments in same-day delivery capabilities support positive trends in subscriber count, order frequency and average order value,” Newman and Tremblay wrote.

For their third theme, the analysts looked at climate change and how governments globally are planning to invest a healthy portion of their recovery stimulus funds on green and climate change-fighting projects. That focus will put renewable natural gas company Xebec Adsorption again in the spotlight, they said.

“Overall, we believe increased investment in green technologies and infrastructure, including those that form part of governments’ economic recovery plans, could act as a catalyst for XBC’s revenue and earnings growth for 2021 and beyond,” Newman and Tremblay said.

Parkland came through as one of Desjardins’ Top Picks, with the analysts have the stock at a “Buy” rating with a $46.00 price target, which at press time represented a projected one-year return of 5.8 per cent. The analysts said Parkland is likely to thrive in 2021, regardless of whether the pandemic extends (or even worsens) over the course of the year or vaccine take-up eliminates COVID as a significant factor.

“We are confident that the company is well-positioned to withstand and even thrive in either scenario given: (1) its resilient underlying business )a rational market (supporting margins), remotely located sites, ability to place diesel and jet fuel (supporting refinery utilization levels), supply advantage and resilient c-stores); (2) a groundswell of organic growth opportunities; (3) acquisitions, primarily in the US; (4) ~$50–70 million in annual permanent cost savings; and (5) a pristine balance sheet ($1.6 billion in liquidity at the end of 3Q20, strong cash flows and an estimated net debt/EBITDA of 3.1x in 2021),” the analysts wrote.

Water treatment solutions company H2O Innovations also got the nod as a Top Pick, predicting that ageing and insufficient water and wastewater infrastructure globally could attract a portion of government recovery spending. The analysts said HEO should build on its solid M&A track record as well as post positive organic growth in 2021. Newman and Tremblay have HEO as a “Buy” with a $3.00 target, which at press time represented a projected return of 50.8 per cent. (All figures in Canadian dollars except where noted otherwise.)

Disclosure: Nick Waddell and Jayson MacLean own shares in WELL Health and the company is an annual sponsor of Cantech Letter.