FormerXBC Inc XEBEQ

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Still very cautious as is evident from their new SP. GLTA

Xebec Adsorption Inc.

(XBC-T) C$3.88

Updating Estimates Following U.S. Manufacturing Acquisition

Event

We are updating our estimates following management's call with analysts.

Impact: POSITIVE

Details: Yesterday, Xebec announced the acquisition of UEC (flash note) for $9.9 million, a Colorado-based natural gas compression equipment manufacturer including a 100,000 sqft facility and existing operations with guidance for $43.3 million in 2021 revenues. This morning, management held a call with research analysts.

Analyst Call Takeaways:

• Xebec intends to fulfill Canadian BGX Biostream and Hy.GEN orders from its facility in Quebec and U.S. orders from the new Colorado facility.

• Employee training will occur over the next 4-6 months and management expects to begin fulfilling orders in H2/22 out of the new facility.

• Minimal capex required as facility already configured to fulfill BGX/Hy.GEN orders.

  Estimate Changes: Financial disclosures remain limited, with management deferring to next week's Q3/21 earnings release. Our revised estimates result in lower-than-expected capital spending/acquisition costs, incorporate management's 2021 revenue expectations disclosed in the press release, add a $25 million placeholder to Q3/21 backlog, and assume a 4% EBITDAS margin for UEC's legacy operations that we believe is consistent with public natural gas compression industry peers given what is currently a highly competitive space. Details on page 2.

  TD Investment Conclusion

  This acquisition exceeded our expectations, and are pleased that Xebec was able to obtain manufacturing capacity at a much lower-than-expected cost. The lower- than-expected capital outlay and increased revenues have positive implications for our NAV calculation and result in a $3.75 target price ($3.00 previously). However, we continue to believe that Xebec remains in "show-me" territory with institutional investors and that the financial performance of its core Cleantech Systems segment will be the primary driver of bringing sustained interest back to the name. As a result, we are maintaining our HOLD rating, but would consider revisiting our investment thesis if the company can demonstrate an ability to profitably execute on its growth ambitions.