FormerXBC Inc XEBEQ

Beacon Update and a small Target bump

[savyinvestor333]

Xebec Adsorption (XBC-V) An Encouraging First Step Towards Return to Profitability November 11, 2021 Ahmad Shaath, CFA, MBA [phone] [e-mail]

Q3 Revenue Misses. Q3/FY21E revenue was $27 million vs. our $36 million estimate and consensus $34 million. Relative to our forecast, the revenue miss was attributable to weaker revenue in the Systems segment, which Xebec attributed to its transition to containerized systems where revenue is recognized once systems are shipped (vs % of completion). Revenue from InMatec and HyGear was $9.0 million, which was disappointing (we were looking for ~$13 million). The Service segment reported strong revenues ($13.6 million vs our $11.4 million).

Transition Is Helping Profitability As Gross Margins Come in Strong. Despite the revenue miss, Xebec reported adjusted EBITDA that was generally in line with estimates ($300k, inline with our forecast, consensus was $600k). Gross margins in both segments were ahead of expectations, with Systems gross margin of 38.7% (vs our 12.5% forecast and 6.3% in Q2/FY21E) and Service gross margin of 36.8% (vs our 33.5% forecast).

FY21E Guidance Looks Achievable, Visibility into FY22E is Lacking. XBC tightened FY21E revenue guidance range to $120-$130 million, which is towards the upper end of the previous range ($110-$130 million). Excluding the recent acquisition of UEC, this implies Q4/FY21E revenue in the range $33-$43 million. This is generally inline with our and consensus forecast going into Q3/FY21E results. The weaker performance in the Systems segment makes the top end of this range a bit ambitious, but solid performance in the Service segment should help XBC achieve the lower end of the range at a minimum.

Adjusted EBITDA margin is expected to be in the range of -3% to -5% (vs -3% to -4% previously), implying Q4/FY21E adjusted EBITDA of ~$2.6-$4.7 million. At the low end, this looks favorable to consensus ($1.6 million) and inline with our forecast ($2.7 million) ahead of the results. XBC refrained from providing any colour on FY22E revenue and profitability, with the lack of details on UEC (see below) not helping us either.

UEC Acquisition Adds Much Needed Capacity in The US, Benefits To Start in 2H/FY22. Last week XBC announced the acquisition of Colorado-based UE Compression for total consideration of ~$10 million. UEC is a designer and builder of custom air and gas compressors, with expected revenue of ~$43 million. The acquisition adds 100,000 sq ft manufacturing facility, expands XBC’s service network into six new states and adds over 60 employees. Xebec expects to establish its US-based manufacturing base for BGX Biostream with capacity of 150-190 systems and also start manufacturing some of HyGear systems for the US market. The first systems from this facility are expected to be delivered in 2H/FY22E, following a training program for UEC staff that should take ~6 months.

We are positive about the acquisition as it a) adds significant capacity for what will be the cornerstone of XBC’s business (containerized systems in RNG and Hydrogen) b) adds a solid base of highly-skilled staff which is difficult to find in the current environment and c) purchased at favorable valuation (just ~0.3x EV/Sales). We note that we have a) no clarity on UEC’s revenue split (systems vs. service), b) how much revenue attrition, if at all, the transition to the production of BGX systems will cause and c) profitability profile of UEC (FY21E guidance indicate that UEC is at least at breakeven which is a good start).

Revising Our FY22E Estimates Higher on UEC. We revised our FY22E estimates to reflect the recent acquisition of UEC, better performance in the Service segment offset by lower performance in core Cleantech systems and HyGear/InMatec. The transition to containerized systems should result in lumpiness in Systems revenue, at least at the start. Our revised gross margin assumptions reflect steady performance in Service segment (35%) and the benefit from the move to the containerized system (we reflect normalized gross margins to peak at 25% by Q4/FY22E).

Given the lack of visibility into FY22E outlook and XBC’s recent track record, we reduced our valuation multiple slightly (to 3.5 vs 3.8x EV/Sales [FY22E]), which is 1.0x discount to diversified industrial air & gas peers. Our new target price is $4.30 (vs. $4.00 previously), we maintain our BUY recommendation.

[ZouZS3]

Feel like Ahmad complete TD's view. FY21E Guidance Looks Achievable, Visibility into FY22E is Lacking. The first systems from this facility are expected to be delivered in 2H/FY22E, following a training program for UEC staff that should take ~6 months. The weaker performance in the Systems segment makes the top end of this range a bit ambitious, but solid performance in the Service segment

[Ciao]

I believe there was a time when analysts had to do some work and make their own financial projections based on information from management. Since most industrial air and gas peers do not have the growth rates that XBC has, it makes no sense to use this industry multiple nor a "penalized" version of it  for XBC because they did not give them visibility for FY22. Lastly, I believe

[tamaracktop]

So their 2022 revenue estimate is $188 million? So they expect yoy revenues in 2022 to be up 36% over 2021? They are as myopic as Aaron MacNeil. What a joke.

[ZouZS3]

Revenue from InMatec and HyGear of $9 million was disappointing