Xebec Adsorption has more to give investors, this fund manager says

Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News, Analysts, Financials TSX:XBC) had a massive 2020 but there’s likely more upside ahead, says portfolio manager Bruce Campbell, who likes the name as a play on renewable natural gas.

Montreal-based Xebec, which makes gas generation, purification and filtration products for the renewables market, finished 2020 as one of the top-returning stocks on the TSX, up 280 per cent when it was all said and done.

Xebec has been the beneficiary of an overall push into clean tech and renewable energy generation worldwide, and while those 2020 gains were large, the stock and company still have room to grow, according to Campbell, president at StoneCastle Investment Management.

“Xebec has been a past pick and it’s one that we continue to like, and we think that there are a lot of tail winds in this whole sector for years to come,” said Campbell, speaking on BNN Bloomberg on Tuesday.

“They’re in the renewable natural gas business. They basically take waste from what may be a feedlot or from a garbage dump and they basically pull the gases out, they scrub them and then put them back into the natural gas pipeline,” he said.

“The interesting thing is there have been several governments and regulatory bodies who have made it a mandate that they want to have a certain amount of renewable natural gas in the pipeline over say the next five to ten years, so the tailwind really is in Xebec’s corner, for sure,” Campbell said.

Xebec, which just returned to the TSX senior board in January, had quite a year last year when the stock took off early on but was flattened by COVID-19, as the company has operations in China that were shuttered in the early days of the pandemic. But once Chinese operations fired up again and the contract wins started piling up here in North America, Xebec took off.

To take a look at the company’s progress, Xebec finished 2018 with $20.2 million in revenue, followed by $49.3 million for 2019. The first nine months of 2020 have together eclipsed that mark with $50.2 million by the end of Q3 2020.

Xebec’s third quarter was delivered in early November and saw revenue grow by 39 per cent year-over-year to $18.4 million with a net income loss of $2.2 million compared to a gain of $1.0 million a year earlier.

The company said the Q3 involved similar challenges to earlier quarters of 2020 where delivering products and services has proven more difficult and installation costs have been higher. As a result, management dimmed its guidance for the full 2020 from between $80 and $90 million to between $70 and $80 million.

At the same time, Xebec emphasized in the Q3 press release that it expects to play a role in infrastructure builds and re-builds worldwide, both now and post-pandemic.

“We believe it is a critical time for governments to consider how they rebuild their economies and how the transition to a low-carbon future play into that. We expect clean energy policies and investment will come to the forefront worldwide, as we have already seen in Europe and our home country, Canada. We are encouraged to see quoting activity for renewable gas projects has picked up in the second half of this year and we remain positive about our future outlook,” Xebec said in the November 10, 2020, press release.

Campbell would seem to agree with the sentiment, calling Xebec a leader in the RNG field.

“There are a few different leaders out there and Xebec is one of them. They continue to build systems and produce them and now they have a build-and-operate model as well,” Campbell said.

“[The stock] tends to be fairly volatile as the money flow comes in and out as some of these stocks, but we think over time it continues to go higher,” he said.

On Xebec’s prospects in 2021, Beacon Securities analyst Ahmad Shaath recently commented that the company’s acquisition of on-site hydrogen generation company HyGear at the end of 2020 will be a difference-maker for the company. The $156-million deal for the Netherlands-based industrial clean tech company adds to Xebec’s capabilities, Shaath said, and puts the company in the “enviable position” of being a profitable hydrogen generation company.

“[HyGear] gives Xebec steam-methane-reforming technology for the generation of hydrogen (grey hydrogen) and many other attractive products in the industrial gasses space (details in the report). The companies fit well together from a technology and business model perspective,” Shaath wrote in a January 4 update to clients.

With his update, Shaath reiterated his “Buy” rating on Xebec while raising his target price from $6.00 to $11.50, which at the time of publication represented a projected one-year return of 28 per cent.