Haywood remains bullish on H2O Innovation

Haywood Capital Markets analyst Colin Healey has stayed the course with H2O Innovation (H2O Innovation Stock Quote, Chart, News, Analysts, Financials TSXV:HEO), maintaining his Buy rating and target price of $4.00/share in a research piece Tuesday. The analyst reiterated the view from his May analysis that the company’s stock is presently undervalued.

The Quebec City-based company, which provides customized water treatment systems based on membrane filtration technology for municipal, industrial, energy and natural resources customers, along with having a line of specialty products for the water industry, has a positive outlook after landing a contract for the Operations and Maintenance (O&M) business in Laurel, Mississippi.

Healey views the Laurel contract as a win, but not out of line with present growth projections.

“We expect the O&M backlog to fill out as long-term contracts start to renew, and acquisitive growth will further fuel top-line growth as H2O closes in on its 3-year strategic plan objectives well ahead of schedule,” he said. “As H2O grows and diversifies its business, we continue to see it trading upwards towards the peer group multiple.”

The contract with Laurel, located in southeastern Mississippi, runs for four years at a total of $10.4 million, adding to the five-year, $5 million O&M contract it signed with the town of Warren, Rhode Island last month, giving the company a total sales backlog of $83.2 million, a 25.3 per cent increase from its third-quarter figure of $66.4 million.

“The City of Laurel is approximately 100 miles north of our main O&M office in Gulfport, MS and will be supported by our other public works employees in the region,” said Gregory Madden, Chief Strategy Officer of H2O Innovation in a July 20 press release announcing the contract. “We are really excited to expand our O&M presence in Southern Mississippi and are grateful that the City has chosen to put their trust in our team.”

One sign of the company’s potential is its current trading state, with Healey noting that H2O is trading at a 1.3x EV/Revenue multiple of Haywood’s CY21 estimate, which is lower than its industry peer group average of 2.7x EV/Revenue.

Overall, the company appears to be on a steady growth path, with Haywood projecting H2O’s 2021 revenue to hit $148.5 million, a jump from 2020’s year-end figure of $133.6 million, with 2022 revenues forecast to reach $158.3 million.

H2O’s adjusted EBITDA is forecast to be on a similar trajectory, with the 2021 projection of $15.8 million representing a 26.4 per cent rise over 2020’s reported $12.5 million, with 2022 forecast to hit $17 million.

Consequently, margins are projected to rise in lockstep, with the gross margin forecast to grow from 26.9 per cent in 2020 to 28.9 per cent by 2022, and the EBITDA margin projected to rise from 9.4 per cent to 10.7 per cent in the same timeframe.

On top of its O&M contracts, H2O Innovation has remained busy since reporting its third-quarter results at the end of May, most notably having its specialty chemical business lines, PWTTM and Genesys®, come together on July 1 to form the H2O Innovation Specialty Chemicals Group. Though both brands will continue to exist, the new management structure reflects a singular vision for the group.

“This new structure will bring the wealth of membrane knowledge that exists within both the PWT and Genesys sales, research and manufacturing teams to all our customers,” said Frédéric Dugré, President and Chief Executive Officer of H2O Innovation in a July 6 press release. “They will also have access to a wider range of chemical products and services. We are of course committed to respect agreements currently in place as we look for every opportunity to bring the synergy of the combined group to the market through our distribution network.”

In addition, H2O was awarded 10 new contracts totaling $4.5 million in values to boost its Water Technologies & Services pillar, with the sales backlog on that front now hitting $35 million.

“We are very excited by these new projects and by the diversification of our portfolio with more industrial projects, characterized by higher gross profit margins,” Dugré said in a June 1 press release. “Our WTS team is focused on delivering value by developing customized solutions to solve all kinds of water related problems. Our main goal is to simplify complex water problems and design the best solutions for our customers.”

With the company’s financial year-end having passed on June 30, Healey believes there is plenty of room for H2O to continue its positive momentum, particularly with its focus on high-margin projects with potential to generate revenue for multiple business pillars.

“We believe strong financial performance over the next few quarters and further improving/stabilizing EBITDA margins will lead to share price appreciation,” he said. “We see H2O as undervalued at these levels and as such are maintaining our target price of $4.00 and our Buy recommendation.”

At the time of publication, H2O Innovation was trading at $2.22/share, down a cent from its Thursday opening.