FormerXBC Inc XEBEQ

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Xebec Adsorption (XBC-V) A Year to Forget As Expectations Reset for FY21E March 25, 2021 Ahmad Shaath, CFA, MBA [phone] [e-mail]

Q4 Results Non-Event; FY21E Guidance Is Conservative; We Agree And Take A Similarly Prudent Approach to Our FY21E Estimates.
Xebec reported Q4/FY20 results that were largely inline with its pre-communicated expectations (see our report here, summary table on Page 2). More importantly the company provided guidance for FY21E that called for revenues of $110-$130 million, EBITDA margin in the range of 3%-4% (implying EBITDA in the range of $3.3-$5.2 million) and for RNG to represent anywhere from 20-30% of its FY21E revenues (implying RNG revenues in the range of $22-$39 million). The guidance was below our prior estimates (rev. $142 million, EBITDA/margin of $9 million/ 6.6%) and consensus estimates (rev. $144 million and EBITDA/margin of $11.3 million/7.8%). We understand management elected to take a very conservative approach and parsing through the details of each segment we tend to agree (details below).

The Service Segment is Doing Well, with Upside Potential from Potential Introduction of Inmatec Offerings in North America. In the Service segment, Q4/FY20E results showed revenue of ~$10.4 million (vs. our $7.7 million forecast) excluding the acquisition of Inmatec and with only two months contribution from Titus. Xebec continues to deliver solid organic growth in this segment in the low double digits. Capacity at Inmatec is constrained at the moment but upside exists from expansion into North America leveraging XBC’s existing facilities. We revised our Inmatec forecasts to reflect the capacity constraints and leave expansion into North America as an upside. We continue to reflect no acquisitions in this segment but note that management continues to be in active discussions with multiple targets and aims to close 3-5 acquisitions per year until 2025 to grow the segment’s annual revenue to $250 million. On a positive note, we tweaked our organic growth assumptions (to 8%), which is also now comes off a higher base, justified by the strong Q4/FY20 showing. Overall, our FY21E revenue forecast for the segment remain unchanged. For FY22E we reflect similar organic growth and for XBC to gain full-year benefit of Inmatec (at 0% growth).

RNG Focus on The Containerized Biostream System. Q4 did not include major surprises from the RNG business, with guidance confirming our $24 million forecast for FY21E as a worst-case scenario (low end of revenue guidance of $110 million and % of RNG at 20%.) The company confirmed that the first Biostream system has been commissioned in California, with another 6 systems to be delivered this year. The containerized system, which should have gross margins in excess of 30%, is central to XBC’s success in RNG. Management confirmed that 1H/FY21E will carry the last of its zero margin RNG systems, and we should expect margins to pick up thereafter and the company to be 100% focused on pushing the Biostream system. We note that Cleantech backlog stood at $73.7 million, of which we estimate RNG to be $40-$50 million. Management confirmed that the company’s auditors took a comprehensive look at the backlog and no revisions are expected. The upside in this segment will hinge on XBC’s success in winning orders through its Biostream systems. Initial signs of success will be gleaned from the commissioning of the 6 systems that will go into various types of projects.

Hydrogen to be Driven by HyGear. Xebec’s hydrogen business, driven by PSA systems and its newly-acquired Hygear business, continues to track well and the company expects solid growth in FY21E. We estimate Xebec will generate just shy of $30 million in FY21E revenues from hydrogen, most of which to come from HyGear. We do note that our forecast reflects a conservative assumption for XBC’s PSA systems that goes into hydrogen generation/upgrading, which we believe to be a prudent approach as the company focuses on steadying the ship in its RNG business. Over our forecast period, we reflect modest 10% growth in HyGear’s business and XBC to continue to gain traction with its PSA systems for hydrogen fueling/upgrading applications (reflecting just another ~$10 million in new orders).

Valuation is Largely Driven by Hydrogen. Over our forecast period, we see XBC to continue to be largely driven by its Service segment (~57% of revenue) and secondly by its hydrogen business (growing from 24% in FY21E to 27% in FY22E), with RNG decreasing in importance (from 20% in FY21E to 17% in FY22E). Given the relatively increased visibility now that XBC provided its FY21E guidance, we tweaked our valuation multiples accordingly: Hydrogen 21x (vs peers at 45x) vs 13x previously, Industrial 4.5x (inline with peers) vs 4.0x previously and kept RNG unchanged at 4.5x. Our $7.50 TP remains unchanged, with hydrogen driving 60% of the value given the high valuation multiples in the sector. BUY.