H2O Innovation is our Top Pick, says Desjardins

Desjardins Capital Markets analyst Frederic Tremblay reported on Canadian water treatment tech company H2O Innovation (H2O Innovation Stock Quote, Charts, News, Analysts, Financials TSX:HEO) on Thursday, saying the stock is a Top Pick for the upcoming year.

Québéc City-based  H2O Innovation, a water solutions company, announced on Thursday that its Operation and Maintenance (O&M) business line has been awarded a new three-year contract along with an extension of an exiting contract for a period of five years starting January 1, 2023.

The new three-year O&M contract is for a wholesale water treatment facility in Calhoun County, Texas, where the plant treats surface water from the Guadalupe Blanco River to produce potable water for municipal, industrial and retail customers.

“I am pleased that our continued presence in this industry allowed us to win this important contract. It shows that H2O Innovation is committed to investing in and growing its business in this State,” said H2O President and CEO Frédéric Dugré in a press release.

Commenting on the news, Tremblay noted that the contracts have a combined value of $29.9 million and he estimated about 50 per cent of that to be new business, while the remainder is from the renewal of the existing base contract. Together the agreements add 24 per cent to the company’s O&M backlog, putting it at an all-time high of $156.2 million.

“[W]ith today’s announcement, HEO continues to add sizeable new mandates across its broad portfolio of products and services. Recall that earlier this month, the WTS segment won $12.1 million in new US municipal water treatment projects,” Tremblay wrote.

The analyst said Desjardins identified HEO as a top pick in its 2023 outlook, released on Wednesday. He said his thesis rests on: H2O’s excellent organic growth outlook, supported by a record backlog and a “tidal wave” of opportunities; the resilience of its business, stemming from the essential nature of water and wastewater treatment, secular sector tailwinds and H2O’s large base of recurring revenue; targeted improvements in cash flow generation through working capital management and margin expansion; and a “mouth-watering valuation.”

H2O Innovation’s share price has been slowly edging upwards over the second half of 2022, but the stock remains down about 18 per cent for the year.

With the update, Tremblay reiterated a “Buy” rating on HEO with an “Average” risk rating and target price of $3.50 per share, which at press time represented a projected one-year return of 69.9 per cent.