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Here’s why Xebec Adsorption is my Top Pick, Bruce Campbell says

The stock has been beaten up pretty good over the past year, but now’s the time for investors to be thinking about Canadian cleantech company Xebec Adsorption (Xebec Adsorption Stock Quote, Charts, News, Analysts, Financials TSX:XBC). That’s according to Bruce Campbell, president of StoneCastle Investment Management, who says Xebec’s projected growth rate combined with sector tailwinds in renewable energy are reasons why he’s named the company as one of his top picks for the 12 months ahead.

“Xebec is in the renewable natural gas business and if you look what happened with energy when we went to renewable energy as a part of the grid, the same thing is happening in natural gas,” said Campbell, speaking on BNN Bloomberg on Friday.

“Different jurisdictions and different companies are all looking at adding renewable natural gas into their pipelines, and that’s exactly what Xebec does. They design and sell those systems and now they’re also getting into operating those systems,” he said.

Xebec, which is headquartered north of Montreal in Blainville, Quebec, makes purification, separation, dehydration and filtration equipment for gasses and compressed air, with business in Canada, the US and internationally. The company saw its share price skyrocket in 2020 as the market took a shine to renewable energy stocks as part of a general trend towards climate-conscious moves being made by governments worldwide to cut down on carbon and fossil fuel use. 

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The renewable gas industry in particular is seen as a way for jurisdictions to clean up their energy grids by taking methane gas producing sources like landfills and agriculture and generating combustible fuels that would otherwise be lost to the atmosphere. 

But while the renewable natural gas (RNG) sector continues to develop in terms of technology and uptake, stocks started peeling back around last February and haven’t really recovered let alone return to the highs of early last year.

That goes double for Xebec, which went from about $4.00 per share in mid-2020 to as high as $11.00 before falling back to Earth. The stock drop was further aided by management’s announcement in March of last year that it was lowering its revenue guidance due to accounting issues related to contracts, calling the 2020 year a tough one for the company, whose revenue is often lumpy due to the timing of contract fulfillment. As a result, the market lost favour in XBC and the stock tumbled as low as $1.50 by February, 2022, before making a bit of a recovery to now the low $2.00 range.

But Campbell says the company is still growing and the stock deserves another look.

“They just recently had an investor day where they laid out a plan to have about 40 per cent compounded annual growth over the next three years. And if you look back at the history, they’ve grown over 50 per cent, so it’s not a stretch for them to be in that range,” he said. 

“The numbers obviously just keep getting bigger. If you look at how they just recently signed a contract that finalized and was even bigger than most people expected,” Campbell said. “I think that this company probably has tailwinds behind them for the next decade as we continue to see increase in renewable natural gas in in the gas pipelines that all of us tap into for our heating.”

Xebec announced earlier this month a contract with an Iowa-based carbon capture and sequestration company, SCS Carbon Removal, whose project, if approved, is being billed as the largest in the world in carbon capture and storage. At US$113.5 million, the contract represents the largest in Xebec’s history.

“We are pleased to be a key supplier to Summit Carbon Solutions’ project for decarbonization,” stated Jim Vounassis, President and CEO of Xebec Adsorption, in an April 12 press release. “With this important order, we look forward to helping bring this CO2 pipeline to fruition and playing our continued part in the global energy transition,” he added.

The company last reported its financials in March where Xebec’s fourth quarter 2021 featured revenue of $45.9 million compared to $6.4 million a year earlier and positive adjusted EBITDA of $0.2 million compared to a loss of $22.6 million a year earlier. For the year, Xebec hit $125.9 million in revenue versus $56.5 million for 2020 and an adjusted EBITDA loss of $8.8 million compared to a loss of $22.0 million in 2020.

Analyst Adam Gill from Paradigm Capital Markets recently commented on Xebec’s growth plans laid out in a three-year strategic plan delivered in late March, saying Xebec’s recent contract announcements bode well for the company going forward. Gill moved his rating from “Hold” to “Speculative Buy” on XBC and raised his target price from $2.35 to $2.50, which at press time represented a projected one-year return of 30.2 per cent.

“Our Speculative Buy rating on Xebec is based on our view that the company has started to show a turnaround in H2/21 on profitability and is continuing to focus half of its business long term on the service segment which drives better margins. We believe the 2024 plan provides clarity on revenue and profitability goals and we take that as a positive for the stock,” Gill wrote.

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