(XBC - TSXV) - Highest Revenues in Company HistoryFrom Andrew Hood of M Partners
We have a Research Note on Xebec Adsorption Inc. (XBC – TSXV).
This morning Xebec Adsorption Inc. announced Q1/19 financial results. Revenue of $9.8M was the highest quarterly result in the Company’s history (+206% YoY) and exceeded consensus expectations of $9.2M. The results were lower than our expected revenue of $12.3M, but we anticipate faster ramp-up and conversion of backlog into revenues in the remainder of 2019. We also accounted for higher revenues from the recognition of Chinese contracts delayed until completion following an IFRS 15 issue announced in April. XBC recognized $1.7M from these contracts in Q1, vs. our expectations of $2.5M. The remaining $3.8M linked to those contracts should still be recognized in the next couple quarters. Our revenue forecast for the remainder of 2019 has not changed, as we anticipate Xebec to convert its backlog to revenues at a faster rate while also securing new orders.
Xebec’s gross margin improved to 34% from 24% in Q1/18. EBITDA in the quarter was $1.1M vs. a loss of $0.9M in Q1/18 and our expectations of $1.6M (reflective of our higher revenue expectations). Net income was $0.4M or $0.01/share vs. a loss of $1.4M in Q1/18. Sales and administrative expenses in the quarter increased $1.0M YoY as Xebec ramped up sales activity and expanded its engineering team. We expect more modest increases in SG&A moving forward, at around 20% of sales. Management maintained its revenue guidance for 2019 at $45M, and we continue to believe XBC will exceed this guidance by year-end. They also maintained earnings guidance of $0.10-0.13.
Following our call with CEO Kurt Sorschak, we remain optimistic about Xebec’s opportunity in 2019 and beyond. At the time of our last update, Xebec had indicated it had $540M in quotes out globally. In just a couple months, this figure has expanded to $760M. Management anticipates capturing $150-200M of these quotes as orders over the next 24-36 months. Even for its current order backlog of $71M, Xebec should be able to recognize $35-40M in revenues in 2019.
We also highlight the potential for significant contract wins beyond our expectations over the next couple years. For example, Spain is in the process of crafting its renewable natural gas policies, and Xebec is aiming to serve the market once these policies are in place. XBC also continues to build out its new Build, Own, Operate segment, which has potential to become its biggest revenue driver and provide recurring revenues in the long run. Earlier this month, the Board of Directors approved a strategy to expand this segment and engage with a larger number of potential partners to explore opportunities in Canada and California.
VALUATION
For the purposes of our target price, our valuation is based on a short-term forecast – longer term we believe Xebec will only continue to generate value for shareholders. Since our forecast is focused on the short term, we do not factor in any contributions from the BOO or Power-to-Gas segments, which could ultimately contribute half of Xebec’s revenues in the long-term. We also note that even our short-term forecast would need to be revised in the event that Xebec signs even one landfill order in the U.S. A single order could add $15-30M in revenues and $3.7-7.5M in EBITDA on top of our forecast.
We value Xebec based on 18.0x 2020 EBITDA, arriving at a target price of $2.20/share. XBC currently trades at ~11.9x 2020 EBITDA, which we believe could prove to be a modest valuation considering its growth prospects. It is also very important to keep in mind that Xebec has tremendous potential to exceed our estimates for EBITDA with even one large order. Considering the traction the Company is building in key markets, it is possible that multiple large orders are secured over the next couple years, expanding EBITDA and potentially leading to a re-rating on the multiple.