Invest in clean water with this junior tech stock

H2O Innovation designs, produces and installs integrated water treatment solutions based on membrane filtration technology to municipal, energy and mining end users. The recent acquisition of Utility Partners could eventually help turn this growth stock into a takeover target.

H2O Innovation Inc. (TSXV—HEO), the Quebec City-based integrated technological water treatment system designer and producer, reported respectable results for the fourth quarter of its 2016 fiscal year.

For the period in question, which ended June 30, the company’s revenues came in at $11.04 million, which was roughly in line with Beacon Securities analysts George Trapkov and Ahmad Shaath’s projection. Earnings before interest, taxes, depreciation and amortization (EBITDA) of $157,000, meanwhile, handily exceeded the analysts’ $26,000 projection.

The analysts keep their ‘buy’ recommendation and their 12-month target price of $2.25 per share for the company.

They say that H2O’s selling, general and administration expenses were loftier on account of hiring to keep up with this growth stock’s increases in selling costs and commissions.

H2O reported a $99.7-million overall backlog as of Sept. 26. The analysts add that Utility Partners’ (UP) results were not reflected in the quarterly results since the acquisition was finalized on July 1.

The company actually paid US$17 million to acquire UP. Because of the deal, H2O will now be able to offer operation and maintenance of water and waste-water treatment facilities to clients. Thus, it will become a fully-integrated provider of water solutions.

Over the course of its fiscal 2016 fourth quarter, H2O achieved a gross margin of 33.4 per cent, which was more than Messrs. Trapkov and Shaath’s prediction of 31.2 per cent. Meanwhile, the company’s earnings per share (EPS) was actually a loss of -$0.032.

The analysts note that H2O is Canada’s only remaining publicly listed water company. They say it has been a leader when it comes to water and waste-water treatment systems.

In fact, Messrs. Trapkov and Shaath say that given the company’s large backlog and enticing sector fundamentals, it is ideally positioned to expand is earnings. This could turn H2O into a takeover candidate, add the analysts.

Getting back to the UP deal, the analysts say that the transaction was a smart one for H2O. Specifically, a lot of the small water utilities in North America don’t have operating expertise and have not made technology investments, which Messrs. Trapkov and Shaath argue should heighten demand for water operations and management businesses such as UP.

“The acquisition of Utility Partners was a very important step in H2O’s development as it allows the company to offer complete leasing, operations and maintenance services. UP has long term contracts with 34 utilities located in six states,” say Messrs. Trapkov and Shaath.

“We believe H2O’s management can expand the geographic footprint of UP and acquire additional clients while up-selling supplies from the high-margin specialty product and services division.

“The company is starting to work with the utilities to help them achieve economies of scale and achieve cost savings while offering H2O’s products.”

The company added that it is mulling over the possibility of launching more acquisitions to bulk up its operation and maintenance division.

According to the analysts, the favourable sector fundamentals and the substantial growth opportunities should help the company to achieve loftier profitability and higher stock value.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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