Event
Xebec provided an early warning report in advance of its Q4/20 results that will be
released on March 25, 2021.
Impact: NEGATIVE
Early Warning Details: Given the extraordinary items in the quarter, Xebec has
provided an early warning on Q4/20 results. Notably, Xebec now expects that its 2020
results will come in meaningfully below its prior guidance, including 2020 revenues
of ~$57 million, below its guidance of between $70 million and $80 million. Details
on page 2.
TD View: This is clearly a very negative development for Xebec, particularly since
it has repeatedly communicated its ability to be profitable as a differentiator in
the sector. Although not specifically stated by the company, we believe that this
announcement provides clarity around the sudden departure of Dr. Prabhu Rao,
Xebec's prior COO (announced on February 12, 2021). In terms of our investment
thesis, we note that the negative disclosures announced today ultimately relate to
improperly bidding potential orders for custom-built RNG biogas plants. We believe
this is a solvable problem particularly as the company pivots away from custom-built
RNG biogas plants and toward standardized units. Additionally, our sector outlook for
Xebec across its various end markets (hydrogen, RNG, and other gasses) remains
unchanged.
Upcoming 2021 Guidance Announcement & Estimate Changes: Management
will provide 2021 guidance with its Q4/20 results on March 25, 2021. In light of the
announcements today, we believe that rebuilding credibility with investors will be key.
As a result, we expect that guidance will be very conservative, and are reducing our
2021 and 2022 revenue estimates by 19% and 24%, respectively. Details on page 3.
TD Investment Conclusion
We believe that Xebec is firmly in "show me" territory with investors and its ability
to meet its 2021 guidance over the next few quarters will be critical. Based on
our revised estimates, as well as a reduction to the Cleantech Systems segment
terminal multiple in our NAV to 15x (25x previously), our target decreases to $10.00
($17.50 previously). We believe that the shares are oversold on the back of this
announcement and, as a result, are maintaining our BUY rating.