Stay away from Xebec Adsorption, this fund manager says

Investors may be thinking now’s the time to get in on Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News, Analysts, Financials TSX:XBC) with its share price down by more than half in recent months. But you might want to wait on that, says portfolio manager James Telfser of Aventine Investment Counsel, who thinks the jury’s still out on whether the renewable natural gas company can deliver.

The bears came after Xebec last month when the company lowered its revenue guidance for 2020, going from a previous call for between $70 and $80 million down to $57 million, a 19 per cent drop and enough to put doubt in investor’s minds as to the company’s prospects.

Montreal-based Xebec, which provides renewable natural gas (RNG) generation, purification and filtration systems, had been riding the wave of investor interest in clean tech and green and sustainable resource development, notably in the RNG sector which floated the boats on a number of names in 2019 and 2020.

XBC went on to post gains of 282 per cent and 230 per cent in 2019 and 2020, respectively, bringing its share price from $0.76 at the start of 2019 to as high as $11.00 by mid-January 2021. What followed was a sector-wide pullback over the next couple of months which knocked names like Xebec down a few pegs, but then came the 2020 guidance revision and the stock dropped down to the $4.00 range where it has remained over the past few weeks.

Telfser said Xebec’s story is one of a stock and company that got a little ahead of itself.

“This was a name that was flying high. The valuation was robust, they issued a bunch of equity, they made a couple of acquisitions pivoting a little bit away from the recycled natural gas market, which is where they manufacture the facilities to be able to generate recycled natural gas,” said Telfser, speaking on BNN Bloomberg on Tuesday.

“They really disappointed. They had everything going for them,” he said.

“One of the worries that we saw in the stock was the fact that these aren’t easy contracts to deliver on. They’re very capital intensive projects which means there could be cost overruns. The sector got really hot and people started looking at it. Xebec got a lot of business from that but then they couldn’t deliver on those results and they had to disappoint,” he said.

When Xebec delivered those full year 2020 financials in late March, the company posted revenue of $56.5 million for the year, up 15 per cent from 2019, and an adjusted EBITDA loss of $22.0 million compared to a gain of $7.0 million a year earlier. For the fourth quarter 2020, Xebec hit $6.4 million in revenues, down 53 per cent year-over-year, Adjusted EBITDA of negative $22.6 million compared to positive $2.1 million a year earlier and EPS of negative $0.33 per share. Analysts had been calling for revenue of $4.4 million and EPS of negative $0.12 per share.

In its comments, management called 2020 a challenging year on the company’s financial results, while saying that measures have been put in place to make sure that the accounting and guidance issues wouldn’t be repeated.

At the same time, Xebec said it was very positive on industry dynamics, which favour further investment and interest in RNG by governments and companies worldwide.

“Although the year did not evolve as initially planned as we faced headwinds, including COVID-19, I am excited about the road ahead as the company is in a strong financial position and the market opportunities for us continue to expand,” said president and CEO Kurt Sorschak in a March 25 press release.

“Overall, in 2021 we expect to continue to build on strong revenue growth and plan a return to positive adjusted EBITDA,” said Sorschak.

Commenting on Xebec in a Cleantech sector report on April 6, Eight Capital analyst Sean Keaney said the early-stage status of companies in the sector means that alterations to a company’s current picture can have a dramatic effect on longer-term projections.

“The dependence of valuations on revenue growth is emphasized by pronounced share price movements following revenue-altering announcements,” Keaney wrote. “For example, Xebec was down nearly 50 per cent in the week following a recent negative revision to 2020 revenue.”

“While the revision was substantial as a percentage of 2020 revenue, it only represented about eight per cent of 2022 revenue expectations at the time. This indicates that longer-term growth expectations are very vulnerable to near-term execution,” Keaney said.

For Telfser, Xebec needs to prove itself worthy of even its current valuation.

“This is one I’d be a little bit careful on here,” Telfser said. “We’re not long the stock but it’s not something we would consider buying, even at these levels. I think you have to see a few quarters play out.”

“The valuation is still wild — it trades up there with names like Ballard and Plug Power despite the fact that they’ve had this big disappointment,” he said. “So, sit on the sidelines on this one and see how the rest of the year plays out, It seems almost like they’ve bit off a little bit more than they could chew.”