Xebec Adsorption upgraded to a Buy from Paradigm

Adam Gill of Paradigm Capital Markets likes the turnaround being displayed by renewable natural gas company Xebec Adsorption (Xebec Adsorption Stock Quote, Charts, News, Analysis, Financials TSXV:XBC). In a report on Wednesday, Gill upgraded his rating from “Hold” to “Speculative Buy” while raising his target price from $2.35/share to $2.50/share for a projected one-year return of 30.2 per cent.

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 presented a growth plan to take the company through the 2024 fiscal year as part of its first Investor Day meetings.

“We believe the 2024 plan provides clarity on revenue and profitability goals and we take that as a positive for the stock,” Gill said.

In Gill’s view, Xebec outlining a growth plan provides clarity for the company moving forward, as the company is aiming revenue to be between $300 million and $350 million in the 2024 fiscal year, paired with an EBITDA margin expectation of between eight and 10 per cent. The company’s plan has multiple drivers, including an aim toward manufacturing over 100 Biostream units at $1.5 million per unit, along with a goal of having approximately 50 per cent of total revenue coming from the higher-margin service side of the business.

Xebec is aiming to use two to three per cent of its revenue on its ongoing Hydrogen research and development initiative, with 70 per cent of that spending expected to be focused on hydrogen, 21 per cent on renewable natural gases, and the remainder on industrial initiatives.

“Today marks an exciting chapter in Xebec’s evolution as we chart our path over the next three years to become a global leader in sustainable gases,” said Jim Vounassis, President and CEO of Xebec Adsorption in the company’s March 29 press release. “Over the last couple of years, we have built a strong foundation to launch off and have the right team, technologies and business models in place to execute this three-year plan. Lastly, all of this is supported by large addressable markets in renewable natural gas, hydrogen and carbon capture.”

In addition to the growth plan, the company also announced the signing of a memorandum of understanding with SCSC Carbon Removal, an Iowa-based subsidiary of Summit Carbon Solutions, for the potential order of 51 carbon dioxide reciprocating compression packages, which could come at a value of C$126 million, which would be a 131 per cent increase over the company’s system backlog of $96.2 million as of March 16.

“Our U.S. manufacturing capabilities and carbon capture activities are seeing increasing demand, and we are excited to be involved as a long-term partner with Summit Carbon Solutions,” Vounassis said on March 28. “As the world aims to decarbonize, we expect the need for carbon capture and sequestration solutions to accelerate, and Xebec is well positioned to provide CO2 purification, capture, liquefaction, and compression technologies.”

After jumping up to $125.9 million in revenue in 2021, Gill forecasts another significant move in 2022, with the $207.1 million forecast representing a 64 per cent year-over-year increase. From there, he forecasts continued growth in 2023 at $292.6 million for a 41 per cent year-over-year increase, with an eventual jump to a projected $367.4 million by 2025.

From a valuation perspective, Gill forecasts the company’s EV/Sales multiple to drop from 2.2x in 2021 to a projected 1.4x in 2022, then to a projected 1x in 2023.

Meanwhile, after posting a loss of $8.8 million in 2021, Gill forecasts the company’s EBITDA to turn positive in 2022 at $5.5 million for a three per cent margin, with an expectation for the margin to widen to 11 per cent with $40.5 million in EBITDA by 2025.

With the positive turn expected, Gill introduces EV/EBITDA multiple projections in 2022 at 53.9x, then forecasts a drop to 15.5x in 2024.

Overall, Gill believes Xebec’s value will normalize over time toward the 8-9x range to be in line with other small-cap industrials, but with the market continuing to price in about three years of future growth as revenue ramps up.

“We believe this valuation will be realized as margins improve and the order backlog continues to see solid momentum (with the potential CCS compression unit order a major near-term driver),” Gill said.

Xebec’s stock price has dropped by 50.4 per cent over the last 12 months, and is down by 8.6 per cent 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.