BNS initiates Coverage Target $3.00Capturing Opportunities in the Quest for Decarbonization
INVESTMENT HIGHLIGHTS We have initiated coverage on the common shares of Xebec Adsorption Inc. (Xebec or XBC) with a Sector Perform rating and a one-year target price of $3.00 per share.
Listed on the Toronto Stock Exchange (TSX), XBC is a global provider of clean energy solutions for the distributed generation of renewable and low-carbon gases, primarily renewable natural gas (RNG) and hydrogen. Xebec has an extensive history of air and gas purification equipment manufacturing, installation, and servicing. The company has grown to have manufacturing facilities, clean technology (cleantech) service centres, and research and development (R&D) facilities across North America, Europe, and Asia. XBC offers investors exposure to a growing specialized machinery sales and service platform in the cleantech and renewable gas industries. We expect Xebec to also benefit from a growing proportion of long-term gas supply agreements driven by increasing demand for RNG and hydrogen. The company is targeting various regions within North America, Europe, and Asia where regulatory regimes are supportive of RNG and hydrogen projects.
We believe XBC is well positioned to pursue its strategy and create shareholder value. Our thesis and recommendation are based on XBC’s (1) strong growth outlook, (2) portfolio of proprietary technologies, and (3) reasonable valuation. Fresh strategy and guidance add visibility to growth outlook. At the company’s recent Investor Day, management unveiled its three-year (2022-2024) strategic plan.
XBC expects revenue to grow at a 40% CAGR from 2021 to 2024 and to improve its EBITDA margin to between 8% and 10%. Management also outlined three specific application pillars that comprise the foundation of its plan: (1) RNG, (2) hydrogen, and (3) carbon capture, utilization, and storage (CCUS). Key catalysts. We believe the key catalysts for Xebec include delivering on growth and increasing profit margins; completing acquisitions that strategically expand its product and service offerings, customer base, and geographic reach; and developing commercial and industrial partnerships.
Our one-year target price of $3.00 per share is based on a sum-of-the-parts (SoTP) analysis. This implies a 2024E EV/EBITDA multiple of 23.0x. Xebec is currently trading at 18.3x 2024E EV/EBITDA, which is modestly higher than its peers’. Peers are currently trading at an average of 16.7x 2023E EV/EBITDA (median of 14.4x). Xebec’s target valuation implies a premium to peers, which we view as warranted given its transition to higher-margin and - multiple segments. We believe the company is fairly valued at a 2024E EV/EBITDA multiple of 23.0x and have therefore initiated coverage with a Sector Perform rating.