Paradigm Capital maintains “Hold” rating on Xebec

Adam Gill of Paradigm Capital still needs to examine a few things in regards to Xebec Adsorption (Xebec Adsorption Stock Quote, Charts, News, Analysis, Financials TSXV:XBC), maintaining a “Hold” rating and target price of $2.35/share for a total return of 14.6 per cent in an update to clients on Friday.

Headquartered in Blainville, Que., Xebec Adsorption designs, manufactures, and sells purification, separation, dehydration, and filtration equipment for gases and compressed air in Canada, the United States, China, Korea, Italy, France, and internationally in the systems, infrastructure, and support segments.

Gill’s latest analysis comes after Xebec reported its fourth quarter financial results for 2021.

“Xebec reported Q4/21 results that were better-than-expected on revenue but below expectations on EBITDA,” Gill said. “That said, most of the major issues around cost control seem to be behind the company and the backlog was robust, so we believe XBC is moving to better days ahead.”

Xebec’s quarterly financial report was headlined by $45.9 million in revenue, which came in ahead of the Paradigm Capital forecast of $40.5 million and the consensus projection of $43.7 million. The company’s 71.9 per cent sequential growth was boosted by a beat from its support segment, which reported $22.6 million in revenue compared to the Paradigm target of $17.4 million.

Gill also highlighted growth in the company’s order backlog, which came in at $123.8 million compared to the Paradigm estimate of $109.1 million as growth in systems and support orders turned out better than expected.

On the flip side, the company’s adjusted EBITDA came in at just $200,000, a significant miss in comparison to the $3.2 million consensus estimate, along with the $4.1 million target Paradigm had called for.

Xebec’s gross margin also took a hit, with the 22 per cent report coming in well below the 36 per cent estimate from Paradigm, as well as the 38 per cent margin reported in the previous quarter, with Gill attributing the miss to the company continuing to work through two legacy contracts through 2022, which will have limited profitability, and management expects a learning curve with its new Biostream systems.

On top of its financial results, the company also completed an executive shift, accelerating the appointment of Jim Vounassis as the company’s new President and Chief Executive Officer to bring immediate effect instead of the initial May 12 timeline to replace outgoing CEO Kurt Sorschak, who will remain Chairman of the Board until May 11.

“We are delighted to welcome Jim officially in his role as President and CEO of Xebec, and on behalf of the Board wish him success in taking Xebec through the next phase of its evolution,” said William Beckett, Lead Independent Director of Xebec Adsorption in a separate March 17 press release.

With fourth quarter financial results now in the books, Gill turned the page to 2022 in his financial analysis for the company. After finishing 2021 with $125.9 million in revenue, Gill forecasts a jump to $191.7 million in 2022, good for a year-over-year increase of 52.3 per cent. Looking ahead to 2023, Gill sees the revenue figure climbing to $212.1 million for a potential year-over-year increase of 10.6 per cent.

In terms of valuation, Gill forecasts the company’s EV/Sales multiple dropping from the reported 2.4x in 2021 to a projected 1.6x in 2022, then to a projected 1.5x in 2023.

Meanwhile, after posting an $8.8 million loss in the category in 2021, Gill forecasts positive EBITDA of $8.1 million in 2022 for an implied margin of 4.6 per cent, then widening to $21 million and an implied 10 per cent margin in 2023.

From a valuation perspective, Gill forecasts the company’s EV/EBITDA multiple to check in at 38.9x in 2022 before dropping to a projected 15x in 2023.

Overall, Gill believes Xebec’s valuation will normalize to be in line with other small-cap industrials and a small discount until XBC shows better profitability, with the market continuing to price in about three years of future growth.

“Our Hold rating on Xebec is based on our view that the company will need to show better profitability in the near term to justify the valuation,” Gill said. “While we see Xebec starting to deliver better margins, we believe more on this front will be seen in H2/22, helping to confirm our long-term outlook for the company.”

Xebec has not exhibited growth over the past 12 months, producing a loss of 58.7 per cent in that time, punctuated by a 21.8 per cent loss since the start of 2022. After hitting a 52-week high of $5.22/share on May 26, the stock has been gradually declining ever since, hitting a 52-week low of $1.50/share on March 7.