Canaccord The fundamentals for H2O Innovation Inc. (HEO-X) “remain compelling,” according to Canaccord Genuity analyst Yuri Lynk, who sees a recent pullback in share price as an “opportunity for investors.”
In the wake of sponsoring a virtual non-deal roadshow with the Quebec-based company, he raised his rating for its shares to “buy” from “hold.”
“As a water pure-play, H2O boasts a favourable long-term macro backdrop as the world’s water purification and wastewater treatment needs continue to grow,” said Mr. Lynk. “The company boasts strong underlying organic growth, improving FCF per share trends, and excellent financial flexibility.”
With its EBITDA margins continuing to improve, the analyst said management “sounded upbeat” about its outlook for all of its segments.
“Through strategic initiatives, including higher-margin sales and improving operating leverage, EBITDA margin reached 11 per cent LTM [last 12 months] through Q2/F2021, from 7 per cent in the comparable period of the previous year,” said Mr. Lynk. “Recall, the three-year strategic plan target is more than 11 per cent by F2023. The company also boasts attractive growth potential, planning to reach revenues of $175-250 million in FY2023, from $142 million LTM through organic growth and 2-4 acquisitions.”
“The company has a strong balance sheet and is in active discussions with 10 M&A targets. We estimate the company has a ~$42 million war chest composed of $28 million of additional debt capacity (Net-debt-to-EBITDA sits at 0.9 times, while management is comfortable going to 2.5-3.0 times) and $14 million dollars from 10 million in-the-money warrants. In addition, the company can often negotiate up to 30 per cent of the price paid over two to three years in earn outs. Thus, achieving the 2-4 acquisitions targeted by F2023 (1-3 remaining) is highly likely, in our view, and would imply further upside to our estimates.”
Mr. Lynk maintained a target for H2O shares of $3.25. The current average on the Street is $3.64.