FormerXBC Inc XEBEQ

A Rosier view from Scotia

[savyinvestor333]

Xebec Adsorption Inc.

• XBC-T: C$0.78
• Target: C$3.00
• Rating: Sector Perform

Taking Stock: Stress Testing a Stressed Stock

OUR TAKE: Mixed. XBC reported its Q1 results on last Thursday morning. EPS of -$0.12 was below our/consensus estimate of $0.01/$0.04. Along with the EPS miss, Q1 Adjusted EBITDA of -$9.0m was below our estimate of -$2.9m and consensus of -$2.5m (range of -$11.8m to $0.4m). Subsequently, XBC stock experienced a staggering decline, losing more than half of its market cap over the last four trading sessions on volume >4x higher than the previous 50-day. Not since February 2019, over three years ago, has the stock traded this low. Even considering the miss, we consider the price reaction as overdone and the market’s current risk-off sentiment as contributing to the volatility. While we don’t expect XBC to enter profitability until 2025 (we do forecast positive EBITDA occurring in Q3/22), we maintain that projections for revenue, EBITDA, and earnings growth in the near- to medium-term are more relevant to the company's valuation.

Recently initiated. XBC is a global provider of clean energy solutions for the distributed generation of renewable and low-carbon gases, primarily renewable natural gas (RNG) and hydrogen. The company has grown to have manufacturing facilities, clean technology (cleantech) service centers, and research and development (R&D) facilities across North America, Europe, and Asia. XBC offers investors exposure to a growing specialized machinery sales and service platform in the cleantech and renewable gas industries. We expect Xebec to also benefit from a growing proportion of long-term gas supply agreements driven by increasing demand for RNG and hydrogen. See our initiation report, Capturing Opportunities in the Quest for Decarbonization, for our comprehensive analysis of the company’s business strategy, financial prospects and industry.

Scenarios point to upside even under low-growth assumptions. Exhibits 1 through 5 show our forecasts of revenues, return-on-invested-capital, Adj. EBITDA, EV/Adj. EBITDA, and net debt/Adj. EBITDA under three scenarios: low, base, and high. Our base case scenario drives our estimates while the low and high cases book-end what we view as a 95% confidence internal. Scenario assumptions are outlined on the Scenario Analysis page at the end of this report.

Our one-year target price of $3.00 per share is based on a sum-of-the-parts (SotP) analysis. This implies a 2024E EV/EBITDA multiple of 23.0x. Xebec is currently trading at 7.3x 2024E EV/EBITDA, which is ~3 turns lower than its peers’. Peers are currently trading at an average of 14.7x 2023E EV/EBITDA (median of 13.3x, see Exhibit 6). Xebec’s target valuation implies a premium to peers, which we view as warranted given its transition to higher-margin and -multiple segments. We believe the company is fairly valued at a 2024E EV/EBITDA multiple of 23.0x. Our SotP target build-up and model summary are shown in Exhibits 7 and 8.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly EBITDA (M)	Q1	Q2	Q3	Q4	Year	EV/EBITDA
2022E	$-2.9	$-0.9	$1.2	$3.2	$-9.2	n.m.
2023E	$2.3	$2.4	$2.5	$2.6	$9.8	28.7x
2024E	$3.0	$5.9	$8.9	$12	$30	11.2x
2025E	$11	$13	$14	$16	$53	6.8x

Exhibit 1 - Revenue Forecasts

Source: Scotiabank GBM estimates.

Exhibit 2 - ROIC Forecasts

Source: Scotiabank GBM estimates.

Exhibit 3 - Adjusted EBITDA Forecasts

Source: Scotiabank GBM estimates.

Exhibit 4 - EV / Adj. EBITDA Forecasts

Source: Scotiabank GBM estimates.

Exhibit 5 - Net Debt / Adjusted EBITDA Forecasts

Source: Scotiabank GBM estimates.

 

Exhibit 6 - Comparables Analysis

Source: FactSet; Scotiabank GBM estimates.

Exhibit 7 - XBC SotP Valuation

Source: Scotiabank GBM estimates.

 

Exhibit 8 - Model Summary

Source: Company reports; FactSet; Scotiabank GBM estimates.

Scenario Analysis

Utilities & Energy Infrastructure

Xebec Adsorption Inc. (XBC-T; C$3.00; SP)

1-Year Target/Bull Case/Bear Case Scenarios

Source: FactSet; Scotiabank GBM estimates.

Bull Case (C$4.50)

Our high case assumes $75 million of M&A per year through 2026E, along with higher levels of gross margins, revenues, and revenue backlogs relative to the base case.

• Gross margins: Systems – increase of 150 bp in 2023E and 250 bp in 2024E from 22.5% in 2022E and flat thereafter. Support – recurring 42.5%.
• Revenue: Systems – growing at 11% per year from $111 million in 2023E. Support – growing to $105 million and $125 million in 2022E and 2023E, respectively, and 42.5% thereafter.
• Revenue backlog: Systems – growing at 15% per year. Support – growing at 40% per year.

Our target price under this scenario equates to a 21.6x 2024E EV/EBITDA valuation.

Base Case/Target (C$3.00)

Our base case assumes $60 million of M&A per year through 2026E, along with the following assumptions:

• Gross margins: Systems – increase of 150 bp in 2023E and 250 bp in 2024E from 20% in 2022E and flat thereafter. Support – recurring 40%.
• Revenue: Systems – growing at 10% per year from $105 million in 2023E. Support – growing to $95 million and $115 million in 2022E and 2023E, respectively, and 40% thereafter.
• Revenue backlog: Systems – growing at 10% per year. Support – growing at 35% per year.

Our target price under this scenario equates to a 23.0x 2024E EV/EBITDA valuation.

Bear Case (C$1.50)

Our low case assumes $45 million of M&A per year through 2026E, along with lower levels of gross margins, revenues, and revenue backlogs relative to the base case.

• Gross margins: Systems – increase of 150 bp in 2023E and 250 bp in 2024E from 17.5% in 2022E and flat thereafter. Support – recurring 37.5%.
• Revenue: Systems – growing at 9% per year from $98 million in 2023E. Support – growing to $85 million and $105 million in 2022E and 2023E, respectively, and 37.5% thereafter.
• Revenue backlog: Systems – growing at 5% per year. Support – growing at 30% per year.

Our target price under this scenario equates to a 27.1x 2024E EV/EBITDA valuation.

Investment Thesis

We have initiated coverage on the common shares of Xebec with a Sector Perform rating and a one-year target price of $3.00 per share. XBC is a global provider of clean energy solutions for the distributed generation of renewable and low-carbon gases, especially renewable natural gas and hydrogen. We believe XBC is well positioned to pursue its strategy and create shareholder value. Our thesis and recommendation are based on XBC’s (1) strong growth outlook, (2) valuable portfolio of proprietary technologies, and (3) reasonable valuation.

Risks

Xebec is exposed to several risks common to industrial systems equipment and service providers, including counterparty risk and business development risk. We believe access-to-capital, acquisition-and-integration, operating, and technological risks are the relevant near-term risks.

Key Drivers

XBC offers investors exposure to a growing specialized machinery sales and service platform in the cleantech and renewable energy industries.

We expect Xebec to also benefit from a growing proportion of long-term gas supply agreements, driven by increasing demand for RNG and hydrogen.

Company Description

Xebec Adsorption Inc. (Xebec) is a clean energy solutions provider specializing in the distributed generation of renewable and low-carbon gases. Formed in 1967, Xebec has an extensive history of air and gas purification equipment manufacturing, installation, and servicing. In 2009, the company merged with QuestAir Technologies Inc. and started trading on the TSX Venture Exchange. Since then, the company has grown significantly and now has manufacturing facilities, clean technology service centres, and research and development facilities across North America, Europe, and Asia. In January 2021, Xebec graduated to the TSX and continues to trade under the symbol XBC.

Stock Catalysts and Timing

• Growth execution and improved operating leverage (2022 through 2024).
• Strategic acquisitions (2022 through 2025).
• Deployment of RNG infrastructure fund capital (2022).
• Introduction of, and increases in, carbon prices (ongoing).
• Commercial and industrial partnerships (ongoing).

[tamaracktop]

Very unusually aggressive targets for a report from a Canadian bank. Extremely unusual. Suppose they're correct, and suppose the stock is approaching their targets a year from now. Then extrapolate from that and try to determine what their targets might be 2 or 3 years further down the road. Don't bother if you aren't in for the long-haul. Many here will be long gone before the stock

[tony08]

I know i'm in love but i realy don't think it's gonna be that long....Don't forget the Legacy issue are terminated at the end of year.  The $143 M contract will start been acountable in mid year to help the revenue numbers....And who knows when the announcement of new contract??  I think most people are to much influence by the bad Q1 results and the actual share price

[newcoin]

A HUGE call and it will make a difference. Investors will see that someone is paying attention!!

[Gann999]

Excellent and fair analysis I think they are spot on

[cautiousguy]

So the algorithm,  the trolls, and the shorters do not have ultimate control?  You seem to want it both ways.  Of course you want to seen as the all knowing sage.  So you will choose the narrative you can exploit to your advantage.  

[newcoin]

This is funny. A robot asking about robots? Just look at your family photo album! LOL! What a putz!

[newcoin]

Sorry, everyone. I didn't mean to infect the board with AI nonsense.

[cautiousguy]

So no reasoned response to the observation of you, without hesitation, swapping explanatory narratives in order to exploit events so you never appear to have made a poor decision.  When that fails, then cast aspersions on others and shift the focus away from yourself. yeah, I'm the putz alright.  

[Kronyboy]

BROS we get it, you don't like each other, enough .-.   

[newcoin]

You finally got it right - you are the putz.