HEO stock keeps “Buy” rating at Beacon

Following an update from the company, Beacon Securities analyst Gabriel Leung has maintained his “Buy” rating on H2O Innovations (H2O Innovations Stock Quote, Chart, News, Analysts, Financials TSX:HEO)

On September 19, HEO provided an update on its maple syrup business, noting that it has been cyclical and detailing plans to create new products for the agri-food sector.

“In light of these success stories in diversifying our offering and the magnitude of the potential market, we remain fully committed to the task of building our maple business line towards a vision focused on the agri-food market, which will also limit the impact of the inherent instability associated with maple syrup production and improve our long-term profit margins,” said CEO said Frederic Dugre. “As such, should our efforts to integrate the agri-food market continue to prove successful, our maple business line could, in due course, become a new business pillar within the corporation”.

Leung broke down the impact of the development.

“Over the past 2023 maple syrup season, the industry in Quebec faced a challenging environment, including a late start to the year, followed by above-average temperature, which resulted in a 60% y/y decrease in production. We believe the net impact was a reluctance by maple syrup farmers to purchase end of season inventory, which will likely have an impact on HEO’s fiscal Q4 (ended June) quarterly results. We also believe the backlog going into the upcoming maple syrup season will also likely be impacted. Following the acquisition of Leader Evaporator in mid-2022, we estimate that HEO’s Maple-related revenues are now ~$30M or 10% of total revenues. In our opinion, what is helping to offset this challenging period for Maple is accelerating demand for HEO’s WTS and O&M business divisions. Furthermore, we believe HEO’s strategy of diversifying and expanding its Maple business within the agri-food market should also help to mitigate near-term challenges. The company has also pointed out that the near-term challenges in Maple will not affect its Three-year Strategic Plan, which, as a reminder, includes FY24 (ending June 2024) revenues and EBITDA margins of $255–300M and 10% respectively.”

In a research update to clients September 19, Leung maintained his “Buy” rating and one-year price target of $3.75 on HEO, implying a return of 42 per cent at the time of publication.

Leung thinks HEO will post Adjusted EBITDA of $22.0-million on Net Revenue of $246.4-million in fiscal 2023. He expects those numbers will improve to EBITDA of $26.8-million on a topline of $272.7-million the following year.