The stock is up sharply in recent months, but investors can expect more where that came from on H2O Innovation (H2O Innovation Stock Quote, Charts, News, Analysts, Financials TSX:HEO), according to Desjardins Capital Markets analyst Frederic Tremblay. In a Wednesday review of the company’s just-released quarterly financials, Tremblay reiterated a “Buy” rating on the stock while raising his target price from $3.50 to $3.65, which at press time represented a projected one-year return of 34.2 per cent.
Québec City-based H2O Innovation reported its second quarter fiscal 2023 financials on Tuesday for the period ended December 31, 2022. The company, which provides water solutions and technology for municipal and industrial water and wastewater customers, reported revenue growth of 52.0 per cent year-over-year to $63.9 million and adjusted EBITDA of $6.5 million compared to $3.8 million a year earlier.
H2O said its organic revenue growth was 26.8 per cent and that its consolidated backlog stood at $206.2 million, up 63.4 per cent from a year earlier.
“The measures taken to mitigate price increases in raw materials and rapid inflation in wages are starting to reflect positively on our gross profit margins,” said Frédéric Dugré, President, co-founder and CEO, in a press release. “The roadmap introduced at the Annual General Meeting of Shareholders in December supports further margin improvements and optimization of our cashflow conversion.”
In his commentary, Tremblay said HEO’s top and bottom lines were surprises to the upside, with the $63.9 million in revenue coming in ahead of his forecast at $58.4 million and the consensus estimate at $56.6 million. Adjusted EBITDA at $6.5 million was also a beat of Tremblay’s forecast at $5.2 million and the Street at $5.1 million.
Tremblay said the quarter represented HEO’s fifth in a row with double-digit organic revenue growth, calling the results “spectacular,” with all three of the company’s business segments firing on all cylinders from a demand perspective, he said.
Moreover, the record backlog and continuing industry tailwinds point to further revenue growth up ahead, according to Tremblay.
“We continue to view HEO as well-positioned to keep the highly positive momentum going, thanks to a record backlog, a broad portfolio of products/services and secular tailwinds in the water sector,” Tremblay said.
The analyst has rejigged his numbers and is now calling for HEO to generate full fiscal 2023 revenue and adjusted EBITDA of $247 million and $24.1 million, respectively, and 2024 revenue and EBITDA of $267 million and $28.0 million, respectively.
“Our target increases to $3.65 as we apply an unchanged multiple of 12.5x on our revised FY24 EBITDA estimate. Our valuation is supported by peer valuations. Industry M&A at eye-catching multiples continued with the recently announced Xylem‒Evoqua transaction at more than 20x forward EBITDA pre-synergies,” Tremblay wrote.
HEO shares are up about 49 per cent since mid-September, 2022.
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