Here’s why H2O Innovation stock is still a Buy

With its share price up smartly so far in 2023, the question comes up as to where investors should now be going with Canadian cleantech company H2O Innovation (H2O Innovation Stock Quote, Charts, News, Analysts, Financials TSX:HEO). And, right on time, iA Capital Markets analyst Naji Baydoun has the answers in a Thursday report on the company. Baydoun argues there are plenty of reasons to still be liking HEO, and he reiterated a “Strong Buy” rating on the stock, saying double-digit organic growth is in the cards for the company.

Québec-based H2O Innovation is a diversified water infrastructure and tech company with integrated water treatment solutions for customers in Canada, the US and internationally. H2O has business in Water Technologies & Services, Specialty Products and Operation & Maintenance Services.

The stock tumbled over the first half of 2022, going from about $2.70 to a low of $1.80 by June of last year. But it’s been pretty much all upwards from there, and HEO has hit above $3.00 this month, making for a year-to-date return of about 22 per cent.

Baydoun sees the stock heading higher and has maintained in his report a 12-month target price of $4.00 per share, which at press time represented a projected return of 28 per cent.

In its favour, Baydoun said HEO is on track to deliver above 20 per cent organic growth in its fiscal 2023 (year ended March 31, 2023) and should keep that number in double digits for 2024 due to momentum in its key markets (desalination in the Middle East, privatization of O&M in the US, for example) as well as a number of internal investments the company has made to accelerate sales growth (cross-selling initiatives, additional sales and distribution resources and product innovation).

Further, Baydoun said H2O’s financial performance in fiscal 2023 was buoyed by foreign exchange tailwinds and contributions from acquisitions, both of which should continue to factor into the company’s progress going forward. 

And Baydoun added that while adjusted EBITDA margins have slipped in recent quarters the analyst believes HEO can improve that in fiscal 2024 and onwards as its inherited, lower-margin backlog from its Leader purchase rolls off and price adjustments are reflected in new sales.

“We believe that the combination of strong growth, improving profitability, and a higher relative valuation multiple could potentially support ~20 per cent annualized total shareholder returns going forward,” Baydoun wrote.

“We note that consensus estimates for revenues and EBITDA remain below what we believe HEO could potentially achieve, providing significant upside potential given the strong fundamental industry and business outlook. Furthermore, although relative valuation is currently slightly above historical norms, it is by no means stretched and the shares continue to trade at a large discount to peers,” he said.