H2O Innovation Ord Shs V.HEO

IA Capital Markets - Strong Buy

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IA Capital Markets analyst Naji Baydoun : “strong buy” from “buy” with a $3.50 target, matching the consensus but down from $3.60.

“HEO offers investors (1) low double-digit organic revenue and Adj. EBITDA growth (10 per cent plus per year, CAGR F2021-26), (2) mid-double-digit FCF/share growth (12-15 per cent per year, CAGR F2022-26), (3) potential upside from additional bolt-on acquisitions and strategic M&A, and (4) a discounted valuation relative to peers,” he said. “Despite improving fundamentals and accelerating growth, HEO’s shares have experienced significant valuation multiple compression and are down 31 per cent year-to-date. HEO’s shares are currently trading at 9 times FY2E EV/EBITDA, which is (1) below their recent historical average, (2) at a wider discount to peers than in the recent past, and (3) significantly below precedent transactions at 12-20 times for water businesses. In our view, the improving risk and growth profile of the Company is not currently being reflected in its share price, and we see limited relative downside risks at current valuation levels. The unwarranted YTD share price decline provides an attractive accumulation point for investors, in our view; given the significant potential upside to our revised price target, we are electing to upgrade HEO.”