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Xebec Adsorption gets a target raise from Beacon Securities


Canadian clean tech company Xebec Adsorption (Xebec Adsorption Stock Quote, Charts, News, Analysis, Financials TSXV:XBC) had a topline miss in its latest quarter but the Q3 margins looked good and the company is making encouraging steps towards profitability, according to Beacon Securities analyst Ahmad Shaath, who delivered a report on Xebec on Thursday.

Montreal-based Xebec designs and manufactures renewable energy systems with hydrogen purification, biogas to renewable natural gas, natural gas dehydration and filtration and separation products along with the design, build, sales and services of adsorption and membrane air and gas purification solutions.

The company released its third quarter financials on Thursday, showing revenue of $26.7 million compared to $18.4 million a year earlier and adjusted EBITDA of $0.3 million compared to $0.4 million a year earlier. Xebec’s Q3 gross margin of 38 per cent compared to last year’s 24 per cent, while the quarter produced a net loss of $9.2 million or $0.06 per share. 

“In Q3 we made progress in executing our growth plan while also reducing the impact from our legacy, customized RNG projects. This resulted in a stronger gross margin compared to Q1 and Q2 of this year, as legacy contracts contributed fewer overall revenues and as we saw higher quality revenues across our segments,” said Kurt Sorschak, Xebec’s President and CEO, in a press release.

“Ultimately, we are focused on our transition to standardized products which will reap benefits in both scale and costs. In addition, after the quarter end, we announced the acquisition of Colorado-based UECompression which gives us credible capacity to achieve significant organic growth with our containerized renewable natural gas and hydrogen generation systems for the North American market,” he said.

Looking at the numbers, Shaath said the $26.7 million topline was under his $36 million estimate and the consensus $34 million, with the miss being attributed by Xebec to its transition to containerized systems where revenue is recognized once systems are shipped as opposed to a percentage of completion. For adjusted EBITDA, the company’s $300k was equal to Shaath’s call for $300k but under the Street’s $600k, while gross margins in its two segments were comparatively strong at 38.7 per cent for Systems (versus a 12.5 per cent forecast by Shaath) and 36.8 per cent for Service (compared to Shaath’s forecast for 33.5 per cent).

“XBC tightened FY21E revenue guidance range to $120-$130 million, which is towards the upper end of the previous range ($110-$130 million). Excluding the recent acquisition of UEC, this implies Q4/FY21E revenue in the range $33-$43 million. This is generally inline with our and consensus forecast going into Q3/FY21E results. The weaker performance in the Systems segment makes the top end of this range a bit ambitious, but solid performance in the Service segment should help XBC achieve the lower end of the range at a minimum,” Shaath wrote.

“Adjusted EBITDA margin is expected to be in the range of -3 per cent to -5 per cent (versus -3 per cent to -4 per cent previously), implying Q4/FY21E adjusted EBITDA of ~$2.6-$4.7 million. At the low end, this looks favourable to consensus ($1.6 million) and inline with our forecast ($2.7 million) ahead of the results. XBC refrained from providing any colour on FY22E revenue and profitability, with the lack of details on UEC not helping us either,” he said.

On November 3, Xebec announced the closing of its acquisition of UECompression, a Denver, Colorado-based designer and builder of custom air and gas compressor solutions for power generation, industrial and energy applications. Total consideration was about $10 million. 

Shaath said he’s positive on the acquisition, saying it will add capacity for what will be the cornerstone of XBC’s business in containerized RNG and hydrogen systems, add a solid base of highly-skilled staff which the analyst said is difficult to find in the current environment and that the deal was done at a favourable valuation of about 0.3x EV/Sales.

Shaath has rejigged his estimates on Xebec and is now calling for full 2021 revenue and adjusted EBITDA of $123 million and negative $7 million, respectively, and 2022 revenue and adjusted EBITDA of $200 million and $8 million, respectively.

“We revised our FY22E estimates to reflect the recent acquisition of UEC, better performance in the Service segment offset by lower performance in core Cleantech systems and HyGear/InMatec. The transition to containerized systems should result in lumpiness in Systems revenue, at least at the start,” he wrote.

“Our revised gross margin assumptions reflect steady performance in Service segment (35 per cent) and the benefit from the move to the containerized system (we reflect normalized gross margins to peak at 25 per cent by Q4/FY22E). Given the lack of visibility into FY22E outlook and XBC’s recent track record, we reduced our valuation multiple slightly (to 3.5 vs 3.8x EV/Sales [FY22E]), which is 1.0x discount to diversified industrial air & gas peers,” Shaath said.

With the update, Shaath has retained his “Buy” rating and raised his target price from $4.00 to $4.30, reflecting at press time a projected one-year return of 27 per cent.

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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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