Water Treatment Stock a Solid Trade?

Analyst says H2O Innovation Inc. (TSXV:HEO), a water treatment stock, has shown strong growth in revenue and EBITDA

Capital Ideas Media | November 27, 2019 | SmallCapPower: H2O Innovation Inc. (TSXV:HEO) is the only pure-play water treatment stock on the TSX or TSX Venture Exchange, according to Acumen’s Capital analyst Nick Corcoran. He says the Company’s strategy of operating three complementary segments focused on serving water utilities “appears to be paying dividends.”

(Originally published on Capital Ideas Media on September 18, 2019)

Acumen has initiated coverage of H20 with a “buy” rating and a price target of $2, which gives the stock a projected return of 68%.

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Based on H20’s stock-price history, one could argue that the shares could be a good trade for the next several months.

H20 went public in 2006 with the stock peaking in 2007 above $9 a share. It bottomed in 2013 below $1 and then doubled over several months.

The stock also more than doubled in 2016 over a longer period of months after falling below $1 a share.

H20 could be in the midst of similar run having again fallen below $1 a share last March before shooting up to the current $1.21.

H2O INNOVATION INC. (TSXV:HEO) | 10YR CHART

What follows are some excerpts from Acumen’s report on H20 Innovation:

We are initiating coverage on H2O Innovation, a leader in customized water and wastewater treatment solutions using membrane technologies based out of Quebec City, Quebec.

HEO operates three complementary segments – projects, speciality products, and operations and maintenance – that promote synergies and cross selling.

“HEO has completed twelve acquisitions since it was founded in 2000 and four transactions totalling $37.4 million since 2013. This was supplemented by strong organic growth from 2015 to 2019 of approximately 10%.” – Nick Corcoran, Acumen Capital

GEOGRAPHIC FOOTPRINT, PROJECT SEGMENT

GEOGRAPHIC FOOTPRINT, SPECIALTY PRODUCTS SEGMENT

GEOGRAPHIC FOOTPRINT, O&M SEGMENT

Revenue and EBITDA have shown strong growth…

“HEO has shown strong growth in revenue and EBITDA. Acumen is forecasting revenue and EBITDA to grow at a five-year compound annual growth rate (CAGR) of 19.4% and 14.6%, respectively, through fiscal year 2019.” – Nick Corcoran, Acumen Capital

REVENUE AND EBITDA

…driven by acquisitions and organic growth.

HEO has completed 12 acquisitions since it was founded in 2000. The Company has completed four transactions totalling $37.4 million since 2013.

The acquisitions added to HEO’s Specialty Products Segment (Piedmont in 2013 and Clearlogx in 2015) and operations and maintenance segment (Utility Partners in 2016 and Hays in 2018).

This was supplemented by strong organic growth from 2015 to 2019 of approximately 10%.

HEO is on track to reach its three-to-five-year goal of $250M in revenue and a 10% EBITDA margin.

  • Growing backlog.HEO has successfully grown its backlog from $36.5 million in Q4/2015 to $138.7 million in Q3/2019 through acquisitions and organic growth. We highlight that management has been focused on operations and maintenance contract wins that add recurring revenue and higher margin industrial and wastewater projects.

BACKLOG

  • HEO has a strong track record of accretive acquisitions. We expect HEO to continue its strategy of expanding its specialty product offering and operations and maintenance footprint through acquisitions. Specialty products (with gross margins from 25 – 85%) help increase consolidated margins, and operations and maintenance adds recurring revenue.

Margin expansion. “Margins are expected to expand through, among other things, a focus on higher margin specialty products, higher margin projects (wastewater and industrial over water and municipal), and increasing recurring revenue.” – Nick Corcoran, Acumen Capital

MARGIN

H2O INNOVATION INC. (TSXV:HEO) | 1YR CHART

Catalysts on the horizon.

We believe catalysts for the story include the Q4/2019 results on September 25th (before market open), additional operations and maintenance contracts wins, and acquisitions.

Acumen Capital has not conducted investment banking business with H20 Innovation within the last 12 months.

[Editor’s Note: Shares of H2O Innovation have fallen about 15%, to its current price of $1.06, since the publication of the Acumen report. Since that time, HEO released its fourth-quarter 2019 as well as its first-quarter 2020 financial results, both of which showed a double digit, year-over-year increase in SG&A expenses. In addition, the Company completed a $22 million equity financing at a price of $1.05 per unit.]

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