H2O Innovation Ord Shs HEOFF

From Banque Nationale dated April 4th

[Nadia6519]

H2O Innovation Inc. HEO (TSX): C$2.44 Stock Rating: Outperform Target: C$3.25

HEO Announces Renewal and Expansion of Significant O&M Contract HEO announced that it has renewed and expanded the contract with the City of Gulfport, Mississippi; this is the largest contract in its Operations & Maintenance (O&M) segment. The four-year renewal is valued at $13.9 mln per year and includes a scope expansion for solid waste collection and fleet management; it also includes CPI adjustment provisions. Additionally, the City of Gulfport has the option to extend the contract for up to four additional periods of two years each (potential total contract length of up to 12 years). Valued at $55.5 mln over four years, the contract increases HEO’s O&M backlog to $131 mln (was $86 mln as of Q2/f22) and the total backlog up to ~$172 mln (was $126.2 mln as of Q2/f22).

Takeaways - We view the contract renewal and expansion as a positive for HEO particularly given the increased scope of work, the incremental value (~$13.9 mln per year vs. ~$10 mln prior) and renewal options. While the initial term of four years is shorter than the original five years, we are not particularly concerned given the long-standing relationship between HEO and the City of Gulfport (15+ years), which bodes well for the renewal options to be executed.

Maintain Outperform rating and $3.25 target We reiterate an Outperform rating and $3.25 price target, which implies FY+1 EV/EBITDA of ~15x