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Pullback on Xebec Adsorption is well deserved, this investor says

Fans of Canadian renewable energy company Xebec Adsorption (Xebec Adsorption Stock Quote, Charts, News, Analysts, Financials TSX:XBC) have been crying in their beer for months as the stock continues its descent from all-time highs. But the pullback is not unreasonable, according to portfolio manager Alex Ruus, who says despite the long-term tailwinds for the industry, profitability still matters and Xebec’s lack of black on the bottom line is an issue.

“Xebec is basically an equipment manufacturer that produces compression and other sorts of equipment that goes into the RNG or renewable natural gas market,” said Ruus of Arrow Capital Management, speaking on BNN Bloomberg on Wednesday. 

“This is a stock that had hyperbolic growth for over the last two years going into this year and then this year has been kind of a disaster. You can see it’s actually trading at a 52-week low now and it’s what would I call free fall,” he said.

Quebec-headquartered Xebec is a compressed air and gas company with a number of technology solutions for natural gas generation, purification, dehydration, separation and filtration. Xebec’s biogas upgrading systems are part of the renewable energy sector which saw tonnes of interest from investors in 2020 and into the start of 2021 but one that has fallen on hard times since. 

Tentalus Systems

For Xebec, that included a run from about $4.00 per share in the middle of last year to as high as $11.00 by January 2021. But the downslope has been just as severe if not more so, with XBC now below $3.00 and still dropping. 

Undoubtably playing a role in Xebec’s decline was management’s coming out earlier this year with a correction to its revenue forecast. Where the company had previously said the 2020 year would generate between $70 and $80 million in sales, an issue with previously recognized revenue resulted in management paring that down to $57 million, with the company saying in its 2020 year-end report that it was instituting changes to its accounting practices to better deal with risk related to revenue.

And while that event did seem to provoke some of the downhill movement for the stock, according to Ruus, Xebec’s fortunes of late are overall a matter of the RNG space being too hot and Xebec remaining a show me story in terms of actual earnings.

“This is in what I call the sector of profitless growth companies. It has a really exciting growth profile and really exciting story but it got to such a crazy valuation that it’s just outside of the realms of possibility. And even with the pullback it’s trading at a $400 million market cap and this is a company that’s not making money, and they lost $30 million last year and there’s a bit of a warrant overhang there as well,” Ruus said.

“I wouldn’t touch the stock myself here. I think it could fall quite a bit further, the momentum is negative and the technicals and fundamentals are negative. I think long term, it’s an interesting company that is doing some interesting stuff in an interesting space but I would not touch it here,” he said.

Xebec last reported earnings in mid-August, showing record quarterly revenues of $32.7 million for its Q2 2021 compared to $19.6 million a year earlier. Its net loss was $7.5 million for the quarter and adjusted EBITDA was negative $4.6 million compared to negative $0.1 million a year earlier.

Management said in its quarterly commentary that profitability was close at hand as the company shifts to more EBITDA-friendly products and services, including its Biostream upgrader which had won a contract in the US for RNG projects in the dairy industry.

“In Q2 we delivered record quarterly revenues as we continued to build the organizational foundations which will support us to manage and operate a significantly larger and more diversified cleantech company,” said Kurt Sorschak, chairman, president and CEO, in an August 12 press release. 

“While we still saw a meaningful impact from our legacy production type RNG contracts, I am happy to report that this impact will be reduced going forward. The rest of our verticals in hydrogen, oxygen, nitrogen, and the Cleantech Service Network, are EBITDA profitable and continue to perform very well from a revenue growth and margin perspective,” he said.

Xebec’s updated guidance for 2021 have it landing in the range of $110.0 and $130.0 million for revenue but for adjusted EBITDA margins, management produced another correction, saying margins would be lowered to between negative 3.0 and negative 4.0 per cent from positive 3.0 to 4.0 per cent.

“Adjusted EBITDA margin is affected by new investments in supporting higher than originally forecasted future revenues and lower gross margins from RNG projects,” Xebec said.

This week, Xebec announced signing its first set of task orders for the previously announced deal with Brightmark RNG for methane production via the dairy industry in the US. The first task orders are for 18 of Xebec’s BGX-Biostream units and represent the largest Biostream unit commitment to date for the company.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.

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