H2O Innovation Ord Shs V.HEO

Banque Nationale - Bulletin dated Oct. 21st

[Nadia6519]

Q1/f2022 Preview HEO reports Q1/f2022 on November 10, prior to market open, with a conference call to follow at 10:00 am ET (1-888-440-2131). Expecting flat y/y results on tough comp and FX We est. revenues of $35.8 mln (vs. $35.0 mln in Q1/f21), Adj. EBITDA of $3.3 mln (vs. $3.3 mln in Q1/f21) and EPS of $nil (vs. $0.01 in Q1/f21). The flattish y/y results are due to 1) a tough comp for the Specialty Products (SP) segment as a significant number of orders were delivered in Q1/f21 (we est. y/y growth of -4% for SP vs. +2% for HEO); and 2) FX, which could have a y/y revs / EBITDA impact of ~$1.3 mln / $0.3 mln. Street seeks overall revs / EBITDA / EPS of $36.2 mln / $3.4 mln / $0.01. Segmented forecast: O&M strength and SP softness In the O&M segment, we forecast revenues of $18.2 mln (+5% y/y) and EBAC of $2.7 mln (vs. $2.3 mln in Q1/f21). We will look for updates on the renewal of the 5-year, $10 mln per year contract, which HEO is in a favourable position to win – the RFP bidding process ends on Oct. 22. In the SP segment, we est. revenues of $11.0 mln (-4% y/y) and EBAC of $2.6 mln (vs. $2.7 mln in Q1/f21). Other SP segment updates incl. supply chain delays (some postponed Q4/f21 orders to be recognized in Q1/f22) and potential progress passing higher raw material costs. In the WTS segment, we est. revenues of $6.6 mln (+6% y/y) and EBAC of $0.5 mln (vs. $0.7 mln in Q1/f21). We will also monitor contracts moving from engineering to the fabrication stage where the majority of revenues are recognized. Other updates we will look for in Q1/f22 Include: 1) any impact from tight labour markets; 2) M&A outlook / timelines given HEO’s low leverage and robust pipeline; and 3) colour on bidding activity, which should remain positive given U.S./global focus on water reuse/desalination whereas in Canada there are some ~900 water advisories. Maintain Outperform rating and $3.25 target While we have previously highlighted the possibility of volatility, albeit diminishing of late, around any particular quarter results, our thesis on HEO (continued company-specific improvements in addition to positive macro factors) remains unchanged. We maintain an Outperform rating and $3.25 target, implying ~15x f2023e EV/EBITDA.