As was previously mentioned, there seems to be a disconnect between these analysts (aside from Desjardins) and the market. GLTA
Following another quarterly earnings miss, Canaccord Genuity analyst Yuri Lynk sees the profitability of Xebec Adsorption Inc. remaining “under pressure.”
Accordingly, he lowered his recommendation for the Montreal-based air purification equipment manufacturer to “hold” from “buy” after its shares jumped 21.3 per cent on Thursday in response to its premarket earnings release.
“Once again, Xebec badly missed its own guidance,” said Mr. Lynk in a research note. “This time the culprit was supply chain issues in Europe, which management expects to continue through early 2023. The company’s difficulties accurately forecasting its own financial performance throughout all of 2021 is worrisome. On the growth front, it appears the transformational acquisitions of HyGear, Inmatec, and UEC grew less than 10 per cent year-over-year collectively in 2021 on an annualized basis. This pales in comparison to the growth being demonstrated by others in the space. Furthermore, we do not see a hydrogen mobility growth avenue emerging for HyGear in the foreseeable future, which brings us to valuation. Xebec trades at 2.0 times EV/Sales (2022E) versus industrial gas peers at 3.0 times.”
For its fourth quarter of fiscal 2021, Xebec reported revenue of $45.9-million, up from $6.3-million a year early due largely to $35.3-million in gains from acquisitions “against an easy comparator that featured revenue write-downs on 10-12 unprofitable RNG projects.” Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $0.2-million was lower than Mr. Lynk’s $3.9-million estimate and the consensus forecast of $3.2-million.
“Xebec’s gross margin is likely to remain under pressure for the foreseeable future,” said the analyst. “The legacy RNG projects are still running at 0-per-cent margin. The supply chain issues that hurt profitability in Q4/2021 have only intensified. Lastly, we believe the gross margin on the first several Biostream units will be skinny as Xebec likely had to entice customers to try these first-of-a-kind standardized units. Taking a step back, Xebec’s business model has proven vulnerable to externalities over the last year and a half with increased costs to complete projects a common reoccurrence. It is perhaps not surprising then that management will no longer be providing annual guidance.
“The company maintained a positive outlook. Management continues to see positive indicators for demand of its products, but noted it continues to manage supply chain disruptions, and that given the uncertain conditions it would stop providing annual guidance. In a separate press release, the company announced Jim Vounassis transitioned into the role of President and CEO succeeding Kurt Sorschak effective immediately, ahead of the scheduled May 12 date. Mr. Sorschak, who owns 5 per cent of the company, will also retire from the Board on May 11, 2022.”
“Materially” reducing his earnings expectations through fiscal 2023, Mr. Lynk dropped his target for Xebec shares to $2.25 from $5. The average on the Street is $3.40.
“All told, we recommend moving to a neutral stance after the positive stock price reaction to Q4/2021 results,” he said. “In our view, Xebec looks fairly valued given its growth prospects and margin profile”
Elsewhere, Cormark Securities’ Nicholas Boychuk lowered Xebec to “reduce” from “market perform” with a $1.50 target, down from $3.25.
Desjardins Securities’ Frederic Tremblay reduced his target by $1 to $4.50 with a “buy” rating.
“Xebec is entering 2022 with encouraging top-line indicators (record backlog, accelerated RNG quoting activity, expanding capacity) and several potential levers to improve profitability, although supply chain and inflation risks persist. Following an acceleration of the CEO transition, we look forward to the introduction of management’s multi-year strategic plan as part of the investor day on March 29,” said Mr. Tremblay.