OTCQX:HEOFF - Post by User
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Nadia6519on Jan 30, 2023 8:48am
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Post# 35253577
From National Bank - Dated Jan 29th 2023
From National Bank - Dated Jan 29th 2023H2O Innovation (TSX: HEO, Rating: Outperform, Target: $3.00) Overall score of +2 *(operational outlook +1, balance sheet 0, valuation +1)
In f2022 (YE June 30, 2022), HEO performed well from a top-line perspective with organic growth of 18%, completion of three acquisitions and increasing its backlog by 59%. However, higher Covid cases (resulting in lower business activity and absenteeism) in early 2022, supply chain delays and inflationary pressures (some have recently started to ease) impacted the adj. EBITDA margin by -30 bps y/y. In f2023, we expect a gradual improvement on the adj. EBITDA margin, which we see increasing ~20 bps y/y (to 10.0%) due to higher (and more frequent as available) pricing but remaining below f2021 (by ~10 bps) due to tight labour markets, particularly in the U.S.
In individual segments we expect: 1) O&M segment – a stable operating environment as spending on Operations and Maintenance has generally remained stable during prior recessions. 2) SP segment - a generally stable operating environment given the recurring nature of water treatment chemicals and replacement/maintenance parts. We highlight that the Maple segment (we est. ~7.5% of revenues) could be impacted in a recession as maple syrup is considered a luxury product. 3) WTS segment – could see pressures given its recession sensitive nature, particularly on privately funded projects, although with a potential lag on publicly funded ones.
While there could be some offset from the U.S. in-shoring of certain industrial processes and new markets (EVs/lithium extraction), these type of projects can take some time manifest. As the majority of HEO revenues (~78% for f2023 est.) and adj. EBITDA (~90% pre-corporate costs) are related to its two segments (O&M and SP) which are less sensitive to recessions, we score HEO’s 2023 operational outlook +1. HEO’s leverage of 2.6x Net Debt to FY+1 EBITDA is above its historical average of ~1.8x and in line with that of larger peers. We score HEO’s balance sheet neutral (0).
H2O Innovation trades at ~11.8x FY+1 EV/EBITDA, which while below peers at 16.1x, is above its historical average of 9.7x. A recent transaction in the space (Xylem acquiring Evoqua for 20x+ FY+1 EBITDA) suggests room for upside. We score HEO’s valuation +1.
*My comment : they have a chart which lists various companies in an hybrid category which includes different sectors and +2 is the top rating.