H2O Innovation Ord Shs V.HEO

National Bank - Published on the 26th -

[Nadia6519]

Let' s see how this compares with today's results.  GLTA

H2O Innovation Inc. Looking for Growth, Progress Mitigating Inflation and Integration of Acquisitions HEO (TSX) STOCK RATING TARGET EST. TOTAL RETURN C$1.94 Outperform (Unchanged) C$3.25 (Unchanged) 67.5% Q4/f2022

Preview HEO reports Q4/f2022 on Sept 28, prior to market open, with a conference call to follow at 10:00 am ET (1-888-396-8049). Forecasts in line with consensus We estimate revenues of $45.8 mln (vs. $35.2 mln in Q4/f21), Adj. EBITDA of $4.4 mln (vs. $3.1 mln in Q4/f21) and EPS of $0.01 (vs. nil in Q4/f21). Consensus seeks revenues / EBITDA / EPS of $46.8 mln / $4.3 mln / $0.01. Expecting price increases to partially contribute to organic growth We forecast organic growth of 18% in fQ4 on expectations that HEO, alongside industry peers, has been increasing prices on some of its products/contracts to offset higher costs in labour and across the supply chain. To account for lags in price increases (especially in the WTS and O&M segments), we forecast a fQ4 EBITDA margin of 9.5%, which is ~20 bps below the Q3/f’22 TTM margin of 9.7% and ~50 bps below the 10.0% realized in f2021.

We will also be looking for updates on 1) progress with broader price increases, as well as 2) the willingness of HEO’s clients to accept.

Segmented forecast:

Revenue growth across the board In the O&M segment, we estimate revenues of $24.7 mln (+39% y/y) and EBAC of $3.5 mln (+31% y/y) that includes an estimated ~$4.3 mln (+24%) revenue contribution from the late-2021 New York acquisitions. In the SP segment, we estimate revenues of $12.9 mln (+25% y/y) and EBAC of $3.4 mln (+30% y/ y) driven organically via higher business activity (more sales reps), product innovation, and pricing. In the WTS segment, we estimate revenues of $8.1 mln (15% y/y) and EBAC of $0.5 mln (-11% y/y). HEO should also see an FX benefit from a y/y stronger USD (C$1.28 vs. C$1.23 in Q4/f21).

Introducing f2024e forecasts; no change to rating / target We are also introducing f2024e forecasts, which see revenue / EBITDA / EPS increases of 8%/11%/17%.

We are maintaining an Outperform rating and $3.25 target, derived via 1) Peer’s FY+1 EV/EBITDA Multiple (50%) / DCF (50%); and 2) an estimated contribution from acquisitions. Our target price implies a ~14.5x f2024e EV/EBITDA multiple.