Revised Targets Ahead of Wednesday’s premarket release of its fourth-quarter financial results, H2O Innovation Inc. is dealing with “a very Canadian problem,” according to National Bank Financial analyst Endri Leno.
“We expect HEO’s Q4/f23 update to focus on the impact and potential mitigation approaches from the weather-affected 2023 maple syrup season (production down 1 per cent year-over-year in Quebec and HEO’s maple-related revenues are 10-15 per cent of total),” he said. “While a development outside HEO’s control and, as such, not a reflection of its execution ability, 1) it is not necessarily a surprise (we raised this very point at HEO’s Q3/f23 conference call); and 2) the impact will be felt primarily in Q4/f23 and into Q1/f24.
“As a result, we have lowered Q4/f23 and f2024 forecasts. However, we also note that the strategic maple syrup reserve is at its lowest level in a decade while the number of taps is expected to increase by 14 per cent into 2026; hence, there should be increased production and for HEO, demand for equipment over the next couple of years.”
Mr. Leno is now forecasting revenue of $61.4-million, down from $65-million previously but up 18 per cent year-over-year and above the $60.4-million consensus projection. He expects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to fall 26 per cent year-over-year to $3.5-million from a $6.2-million estimate previously and below the Street’s view of $5.2-million.
However, the analyst emphasized the outlook from the Quebec City-based company’s peers “bodes well” for its non-maple business.
“HEO’s water peers have continued to report positive results with elevated organic growth and margin expansion on higher pricing and volume (the latter not universal),” he said. “The peers’ outlook is similarly resilient with increased or steady guidance. Hence, we expect HEO’s, non-maple business (some 85 per cent plus of top line) to perform well and reflected in year-over-year growth (top and bottom lines) for the WTS and O&M segments.”
Also reducing his 2024 expectations, Mr. Leno cut his target for H2O Innovation shares to $3.25 from $3.50, reiterating an “outperform” recommendation. The average target on the Street is $3.71.
“Our investment thesis is based on 1) HEO continuing to profitably grow as it focuses on recurring revenues and higher margin work; 2) continued multiple expansion; and 3) multiple positive macro trends including aging U.S. water infra, increasing water desalination / reuse needs, municipalities outsourcing operation and maintenance of water facilities, fragmented industry, etc.,” he said.
Elsewhere, Canaccord Genuity’s Yuri Lynk trimmed his target to $3.25 from $3.50 with a “buy” rating.