Xebec has a lot of red flags, this investor says

The renewable energy space has lost some of its zip in recent months, and that includes Canadian cleantech company Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News, Analysts, Financials TSX:XBC), which is now trading at about half the price it was at the start of the year. But beyond the secular rotation, investors should be aware that Xebec comes with its own question marks, says Jason Del Vicario, portfolio manager at Hillside Wealth Management.

“Over the past ten years, Xebec has had a tremendous run [but] we look at the stock in the short term here it’s come off from about $11 to $4.85,” says Del Vicario, speaking on BNN Bloomberg on Tuesday.

“But if we really want to look at the fundamentals, I’m seeing a company here that has never printed a positive free cash flow. So right there, that would be a red flag for us, something that would prevent us from buying the shares. I also see that they’re issuing new shares so they’re diluting existing shareholders,” he said.

Xebec got in hot water earlier this year when it lowered its overall revenue guidance for 2020 from $70 to $80 million to $57 million, which was then confirmed in a March 25 reporting of its fourth quarter and full year financials. Xebec hit $56.5 million in 2020 revenue compared to $49.3 million for 2019, while adjusted EBITDA was a loss of $22.0 million compared to a gain of $7.0 million in 2019 and the company ended up with a net loss of $28.3 million compared to a loss of $0.5 million for 2019.

“Despite positive developments in certain segments and acquisitions that we believe position us well for the future, 2020 was a challenging year for Xebec’s financial results as a result of different factors, including the negative impact of COVID-19,” said CEO, President and Chair Kurt Sorschak in a press release.

The result was a high-flying stock laid low, where XBC has yet to recover much of that lost ground. The doldrums are sector-wide, however, with renewable energy stocks across the board feeling under the weather in recent months after big gains last year. The iShares Global Clean Energy ETF (NASDAQ:ICLN), for example, surged ahead 140 per cent in 2020 but is down 20 per cent so far in 2021. Canadian stalwarts like Algonquin Power and Utilities (TSX:AQN) and Brookfield Renewable (TSX:BEP.U) are also down 11 and 13 per cent, respectively.

Even as renewable energy remains very much on the forefront of investment worldwide as governments continue to push their climate change agendas, the sector’s tailwinds have abated somewhat, in part due to difficulties US President Joe Biden is facing with his infrastructure plan, originally proposed at $2 trillion and involving significant investment investment in solar, wind and other renewable energy sources. Biden is now in negotiations with Republican Senators, with the market now wondering whether the end result will be a less ambitious bill, if it gets passed at all.

Del Vicario thinks investors need to put the uncertainties around where renewables are headed into their thinking around companies like Xebec.

“[Xebec] is very much a renewable energy buzzword type of play, but it remains to be seen from our view how the business model does long term,” Del Vicario said. “The one thing that I will say with these types of companies is I’m always very curious … whether their product or service stands on its own two feet, absent government subsidies and support.”

“So, right now, the Liberals in Canada and the Democrats in the United States are very supportive politically of renewable energy. But that could change if we have a different type of government or there’s just a different route that politicians want to take. Those subsidies and that support can vanish overnight, and if a company like Xebec or even Tesla doesn’t have a product that can sustain itself in a normal economic environment, absent subsidies and handouts from the governments, that would obviously be a huge red flag for us,” he said.

“So, I would size this position accordingly. I would have this as a very low conviction position at about a one or two-per-cent weight in a portfolio, max,” Del Vicario said.

Last month, Xebec posted first quarter financials which saw revenues climb to $20.6 million for the three month period ended March 31 compared to $12.2 million a year earlier. Adjusted EBITDA was a loss of $5.8 million compared to a gain of $0.7 million a year earlier.

Management maintained its 2021 guidance, calling for revenue in the range of $110 to $130 million and an EBITDA margin in the three to four-per-cent range.

“Given the trajectory of the economic recovery and the RNG and hydrogen industry activity, we believe we are at the start of a significant economic upturn that will support the company’s continued rapid growth,” said Sorschak in a press release.

“There are positive indications for increased manufacturing activity across North America and Europe, alongside accelerated decarbonization cuts which will drive traction for our cleantech solutions,” he said.