Beaten down Xebec is a buy, this fund manager says

It’s been a rollercoaster ride right across the clean tech sector over the past couple of years, and that goes double for Canadian renewable energy company Xebec Adsorption (Xebec Adsorption Stock Quote, Chart, News, Analysts, Financials TSX:XBC), which lost some investor faith earlier this year when management had to roll back its revenue guidance.

But with the stock now worth less than half its value of January and early February, Xebec should be on your radar, says Jamie Murray, portfolio manager and head of research for the Murray Wealth Group.

“Xebec is a clean tech company and they’re buying up some of these air and gas and compression companies around North America, doing a roll-up strategy. But the stock has really been a little bit weak in the last couple of months,” said Murray, speaking on BNN Bloomberg on Monday.

“They’ve had some accounting issues and they’ve had some management turnover, so that sort of took the wind out of their sails and the market lost confidence in the management team,” he said.

Like many names in the renewables space, Xebec, which makes gas generation, purification and filtration systems, was flying high both before the pandemic and over much of 2020, as investors took to the notion of strong tailwinds to the industry. Governments worldwide have promised support for renewables as industries transition away from fossil fuels, thus making a play in energy sources like wind, solar, hydroelectric and renewable natural gas seem like a smart move.

And it was, up until early 2021 when the renewables space had a major correction. Stocks like Brookfield Renewable Partners (TSX:BEP.U) and iShares Global Clean Enery ETF (NASDAQ:ICLN) lost around a third of their value between mid-January and mid-May, as the market vacated the space in droves.

The same went for Xebec, which catapulted from $2.50 per share at the start of 2020 to $9.00 by the year’s end, and the stock even reached a high of $11.20 by mid-January before starting to turn.

And turn it did, in part egged on by an announcement by the company that 2020’s revenue would not come in between $70 and $80 million as previously guided but would be closer to $57 million, a major drop which Xebec said was the result of accounting errors related to previously recognized revenue and to previous estimates on the profitability of some of its contracts.

Xebec ultimately came in with revenue of $56.5 million for the 2020 year, up 15 per cent from 2019’s topline, with management saying in the fourth quarter press release in March that it had made several changes to its accounting practices to better adjust for risks associated with its business.

“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 Xebec CEO Kurt Sorschak in a press release.

Murray says the end result is that the company is now in a better position, which should be enough for investors to take another look at the stock.

“It seems like that’s going to turn around and they’re starting to rehire and rebuild the management team. They’re trying to win some new contracts again,” Murray said. “So, at this price we think it’s a good entry point.”

“With these companies, the newer companies or smaller companies, there’s going to be growing pains as they go along, and I think Xebec is well-positioned to benefit from this clean tech revolution that we think we’re going to see a lot of spending in over the next decade,” he said.

“So it’s one that I’d be looking at. We’ve been buying it at these prices in our Canadian portfolios,” Murray said.

Xebec has announced a number of new contracts in recent months, including last week a Master Service Agreement (MSA) with a leading US-based renewable natural gas dairy farm project developer for the purchase of Xebec’s BGX Biostream upgrading solution. The order is for an initial 18 BGX units with the potential for more under the service agreement, where the units start at a list price of US$1.5 million.

Xebec says the US livestock-based RNG market is significant, with over 8,500 dairy, poultry, and swine farms capable of being set up for RNG production, with dairy farms being the leading livestock-based RNG producers in the US.

“This MSA shows the strong value proposition developers and farmers see in our products, as they accelerate the development of carbon-negative renewable natural gas production,” said Sorschak in a July 6 press release. “We are proud to be playing such an important role in this energy transition and look forward to ramping up our production capacity.”