H2O Innovation Ord Shs HEOFF

Full piece from Desjardins

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H2O Innovation Inc. Frederic Tremblay, CFA • [phone] • [e-mail] Liam Bergevin, Associate • [phone] • [e-mail]

Rating: Buy, Risk: Average, Target: C$3.50 HEO C$2.61, TSX First take on 2Q FY23 results; 26.8% organic growth contributes to a beat

The Desjardins Takeaway: Positive HEO posted stronger-than-expected 2Q FY23 results featuring a fifth consecutive quarter of doubledigit organic revenue growth (26.8%) and an adjusted EBITDA beat. A conference call is scheduled for today at 10am EST (dial-in 888-396-8049). Organic growth of ~27% contributes to better-than-expected revenue. Revenue increased 52.0% yoy to C$63.9m, ahead of our forecast of C$58.4m and consensus of C$56.6m.

Organically, revenue rose a spectacular 26.8% thanks to high demand for specialty chemicals and parts, new and expanded O&M mandates, robust demand from capital equipment projects and the gradual implementation of price increases.

This was HEO’s fifth consecutive quarter of double-digit organic growth. In addition, the C $8.3m contribution from acquisitions (JCO, EC, Leader) was in line with our forecast of C$8.0m. Adjusted EBITDA of C$6.5m beat our forecast of C$5.2m and consensus of C$5.1m. The beat was primarily driven by HEO’s significant top-line strength, and adjusted EBITDA margin of 10.2% was above our estimate of 8.9%.

Margin was above that last year and last quarter as pricing and cost-related actions mitigated the effects of inflation (eg wages, raw materials). Healthy financial position. HEO ended the quarter with a cash position of C$9.5m and net debt to adjusted EBITDA of 2.2x. Backlog rose to a new record of C$206.2m (C$182.0m in 1Q FY23, C$126.2m in 2Q FY22).

HEO continues to accumulate new wins and renewals in the O&M segment, and new water treatment projects in the WTS segment.

We continue to view HEO as well-positioned to help solve the world’s water-related challenges (eg water scarcity, infrastructure issues, negative impacts from droughts) thanks to its broad portfolio of complementary products and services. Overall, we view the results and outlook positively. The release of strong 2Q results on Valentine’s Day seems appropriate for our top pick as we continue to ‘love’ HEO’s: (1) excellent organic growth outlook; (2) business resilience stemming from recurring revenue and the essential nature of water; (3) margin expansion possibilities; and (4) valuation.