0 $1 - beacon securities · 2017-02-25 · fy15e fy16e fy17e ev/sales 0.7x 0.7x 0.6x ev/ebitda...

Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830 |www.beaconsecurities.ca

H2O Innovation Inc.

(HEO-V)

Growing Water Scarcity A Catalyst

For Record Backlog and Earnings

May 26, 2015

Michael Mills, CFA (902) 425-8897

[email protected]

We are initiating coverage of H2O Innovation

(HEO-V) with a BUY rating and 12-month price target of

$2.25, based on 11x calendar 2016 EBITDA.

The company has a proven track record in the

water membrane filtration market, having been

involved in the installation of over 600 treatment systems

in the last 15 years. Water treatment project work is

experiencing growing demand, partly owing to the

devastating drought conditions in the US southwest.

Backlog now stands at record levels of ~$40 million, with

$200+ million in the North American sales pipeline.

Project work is supported by a very strong

recurring revenue stream from the sale of chemicals,

couplings and other consumables and services. This

accounts for roughly 40% of revenues and generates

gross margins of 40%+ (more than double project levels).

Consumable products are marketed globally.

We believe H2O is in the early innings of a period

of strong organic growth driven by increased market

demand for water treatment – including reuse and

desalination projects. While the company is still small, it

focuses on smaller projects overlooked by international

competitors and executes them well. Ultimately, we

view HEO as a likely take-over candidate in a

consolidating industry. In the meantime, we look for the

company to scale in size, and we believe there are

M&A opportunities that will allow this in the near-term.

This is a growing, profitable business, with a

strong recurring revenue stream, and clean balance

sheet. Management is very experienced and led by the

company founder. With micro-caps name we like to bet

on strong management teams in the right sectors – HEO

fits this criteria perfectly.

$1.50

$2.25

50%

YE: June 30th FY15E FY16E FY17E

Revenue ($MM) $47.8 $54.4 $62.6

EBITDA ($MM) $2.4 $3.5 $4.7

Adj. FD EPS $0.02 $0.06 $0.10

FY15E FY16E FY17E

EV/Sales 0.7x 0.7x 0.6x

EV/EBITDA 14.7x 10.1x 7.5x

P/E 75.8x 25.6x 14.3x

FD Shares O/S 20.9

Market Cap. $31.4

Enterprise Value $35.5

Net Debt $4.1

52 Week Price Range $1.22-$1.98

Initiating Coverage

BUY Target $2.25

Prev ious Close

12-month Target Price

Potential Return

H2O Innovation designs and prov ides state-of-the-art,

custom-built, and integrated water treatment solutions

based on membrane filtration technology for municipal

and industrial end users. Based in Quebec City, the

company also markets a complete line of specialty

chemicals, consumables, couplings and serv ices.

www.h2oinnovation.com

All prices in CAD unless otherwise stated

Stock Performance

Estimates

Valuation

Stock Data ($MM)

About the Company

Jun Aug Oct Dec Feb Apr

$1.10

$1.20

$1.30

$1.40

$1.50

$1.60

$1.70

$1.80

$1.90

$2.00

0

20

40

60

80

100

120

140Volume (Thousands) Price (CAD)

mailto:[email protected]

Who They Are and What Do They Do?

• Quebec City-based H2O Innovation (H2O, HEO, or the company) designs, produces and installscustomized water treatment systems, primarily in North America. The company has been involvedwith over 600 water treatment installations to date. This project-based work is complemented bygrowing recurring sales associated with specialty products such as chemicals, couplings,membranes and services. In addition, HEO has managed to carve a nice niche in the businessserving the maple syrup producers of North America, providing membrane sap concentrators,evaporators and auxiliary products to enhance farmer productivity.

• The company was founded in 2000 by President & CEO Frédéric Dugré, and has traded publicly fornearly this entire period.

• HEO’s vision is to provide the best membrane-related water treatment solutions in North Americawith lasting customer care. Customers are served from offices in Quebec City, Toronto and Calgary,with manufacturing capacity in Victoriaville (QC), Minneapolis and San Diego. The companycurrently has ~170 employees. There are 10 equipment reps for projects and over 80distributors/agents for consumable products. In addition, there are now over 20 project bid teammembers.

• HEO is a system integrator that provides custom solutions for end customers. Its “open sourced”architecture, including notably the HEO FiberFlex™ solution, allows customers to benefit from thebest possible design. This flexibility includes the capability to use membrane filters from varioussuppliers in the future as products improve (akin to being able to buy various tires for your car).

1Michael Mills, 902-425-8897

The Business Overview


• Project revenue split roughly evenly between Canada/US and Municipal/Industrial

• Recurring revenue from specialty products and service account for roughly 40% of all revenues

Piedmont brand

PWT brand

Source: Company reports

Water, Water…It’s Not Everywhere

• Most North Americans take the availability of clean, abundant drinking water for granted. Thereality is that regions are facing dire water crises (California is the poster child) and require urgentaction to augment or supplant existing facilities. Currently, over 90 million Americans live in areasdeemed to be in severe, extreme or exceptional drought conditions (US Drought Monitor).

• The EPA estimates that US$384B is needed for water infrastructure investments over the next 20years in the United States. This includes US$72.5B for water treatment alone. The biggest future billsfor treatment are in California, New York, Illinois, Texas, Florida and Nevada (>US$26B for these six).

• Desalination plants are increasingly being seen as necessary in drought stricken regions. In terms ofwater resource development, desalination and wastewater reuse are the fastest growing areas andexpected to be worth US$23B annually in 2018, up from US$13B in 2014 (source GWI).

• Companies such as H2O are already benefitting from increased demand for water treatmentsolutions, but we believe we are in the early innings of sustained investment for potable water. Atthe moment, H20 is seeing a record flow of request for proposals (RFPs), with particular strengthfrom the US municipal market.

• While water conservation is likely to help, a growing population and continued urbanization willrequire more water resources. Our water resources are increasingly scarce and require investmentby municipal and industrial users. This is where system integrators such as HEO play a critical role.


HEO’s Water Solutions & Recent Projects

• The company’s water treatment solutions include:

Drinking water production, including desalination

Industrial process water

Water reuse and reclamation

Wastewater treatment

• Though confidentiality restricts disclosure of some contracts, we understand that HEO has

participated in approximately 20 large scale (>$1mm revenue to HEO) projects in the last two

years. The biggest projects include work in the oilfield (Suncor and Devon) and a City of Delaware,

OH plant improvement. The list includes at least four projects in the state of California, including a

~$3mm job in Cambria and $2.5mm job at the new reuse treatment facility in Long Beach.

• Clients are typically private or publicly-owned utilities or companies that require their own water

treatment solutions (often in remote areas). Average contract size in F2014 was $1.2mm. The

“sweet spot” for HEO is smaller water treatment facilities of between 1 and 10 million gallons per

day (MGD) that typically serve communities of less than 50,000 people. This covers 80% of the

total municipal market opportunity.

• Fixed price contract wins generally come down to experience, reputation, design, life-cycle costs,

and price.


HEO’s Consumables Business

• The company’s recurring consumables division is called Specialty Products & Services (SP&S).

Water treatment chemicals (Professional Water Technologies (PWT) brand)

High pressure couplings (Piedmont brand)

Parts and services (including filter membrane replacement)

Maple Equipment

• These products and services, which carry higher margins, have accounted for roughly 40% of totalrevenues recently. This provides a strong foundation as gross profit covers ~90% of total SG&A.

• Every treatment plant requires chemicals, accounting for roughly 1% of the upfront equipmentcost on an annual basis. Membrane replacement is an even bigger recurring cost but occurs onlyevery 6-10 years, accounting for up to 10% of upfront equipment cost.

• HEO is able to compete for this consumables business for all water treatment facilities, whetherthey have been involved with the build or not. This is a global marketplace with distributionpartners in place for Piedmont and PWT.

• The Maple division – serving maple syrup producers – is a strong niche area for H2O. With 69% ofmaple syrup coming from Quebec, this is the home market for H2O. We estimate approximately15% of revenues are currently derived from the Maple division.


Filtration Spectrum and HEO Competition

6

• H2O’s systems use various levels of filtration to accomplish the end result, depending on

requirements. Multiple membrane specialties provide a competitive advantage for HEO.

Michael Mills, 902-425-8897

H2O solutions cover wide spectrum

Competitive landscape (source: HEO presentation)

Key Investment Highlights

7

• Growing Market Opportunity

• Record Backlog Supports Outlook

• Recurring Revenues Complement Project Growth

• Profitable Business Could Attract Take-Out Interest


Growing Market Opportunity

8

• With a growing population and ageing municipal infrastructure, capital investments are required

to the North American water system. The EPA estimates US$72.5B needs to be spent over 20

years in the US alone for water treatment upgrades and new facilities. The most recent data

from Canada showed that $1.3B was spent in 2011 on water infrastructure upgrades.

• There are nearly 8,700 community water systems (serving population bases >3,300 each) in the

United States. This includes 687 in California and 980 in Texas (EPA data). To date, H2O has

completed more than 600 installations in total, including more than 40 projects in California.

• North Americans are the heaviest users of fresh water per capita in the world. While water

conservation measures have lowered this figure in recent years, the vast majority of our water

resources go to industrial and agricultural uses. Approximately 80% of water use in California is

for agriculture alone and to date these resources have been spared from rationing measures.

• There exists the potential for H2O to move up the food chain to become operators of water

treatment facilities. There are currently dozens of tender opportunities in this area in the US. We

believe the company could add a third pillar in the O&M sector (operations & management) in

the next couple of years.


Growing Market Opportunity (cont’d)


• The US Southwest is in a multi-year severe drought. Some say this drought is the worst in

hundreds of years. Things are so dire in California that a 25% reduction in urban water use was

enacted by the Governor earlier this year. Voluntary farming-related reductions are also occurring.

• Winter 2015 was the driest in California on record (5% of normal).

• Washington State announced a drought emergency on May 15/15.

• In the United States, there are 46 desalination projects and 51 water

reuse projects in various stages of development (GWI, Feb/15).

These opportunities form the basis of future demand for H2O’s

project and specialty products and services business.

• For the context of this report we focus on North America, but

globally the lack of access to clean water impacts over 1 billion

people.

• Surface water gets all the attention, but the US is also facing the

depletion of groundwater resources. The replenishment of aquifers

through indirect potable reuse is becoming increasingly important.

As of May 19, 2015

Source: Drought Monitor



• Lake Mead, the lake formed behind the Hoover Dam bordering Nevada/Arizona on the Colorado

River, is an epicentre of the water crisis in the SW. The lake is less than 2 feet away from levels

(1075 feet above sea level) where rationing kicks-in on the 7.5 million acre feet per year allocation.

California has the biggest water rights from the Colorado River, with about 59% of the lower basin

(AZ is 37%, NV just 4%). This was established in 1922. The lake is now 143 feet below what is

considered “full” and is at just 38% of capacity.

• Interestingly, below 1075 feet California does not get

rationed, but the other two states do. It is at 1025 feet

(extreme shortage) that California receives a 10% cut.

Water levels are down over 35 feet in the last two years.

• Water shortages are a big concern in the SW, that is

why desalination and water reuse projects are popping

up all over the place.

• As point of reference 1 acre foot of water = 325,851

gallons. It is commonly referred that 1 acre foot

supplies two US residential users annually.

• One acre foot = 1,233 cubic metres

• 1 cubic metre = 1,000 litresSource: graphs.water-data.com



• The Maple division – servicing the North American maple syrup producers – is a strong niche

vertical that fits perfectly with the core membrane expertise business.

• Canada produces an estimated 75% of the world’s pure maple syrup, with Quebec producing

90% of Canada’s share. There were nearly 11,000 maple farms in Canada in 2011 (StatsCan). The

US northeast is also a strong region for maple production, with Vermont being the single largest

US producing state.

• This is a $400+ million dollar a year industry in Canada, with the US being the single biggest

export market. The numbers of farms and gallons of syrup produced is growing annually.

• With regulated selling prices in Quebec, it is important to harvest as efficiently as possible. H2O’s

product line-up services all mechanical aspects for the growers – from lines, to filtration and

membranes, evaporators, and smart meters.

• We believe the company’s industry knowledge and geographic location positions H2O well for

further growth in this industry, from its current top 4 supplier position. There are over 30

distributors selling H2O Maple products in eastern Canada and the US.

Record Backlog Supports Outlook

• H2O does not provide financial guidance, but the project backlog figure does provide forward

visibility. Contracts are only booked into backlog when a firm, signed order is in place. The

majority of backlog is expected to be converted into revenues within a year, however some

projects can take up to 2.5 years to be fully realized.

• While both backlog and the quarterly bookings are lumpy, both are clearly on an uptrend. Q3,

recently reported, was exceptionally strong with $16.4 million in new order bookings.

• Backlog was a record $40.4mm (up 72% y/y).

• Update as of May 20th at $38.6mm.

• This is project work only (no consumables).

• There are roughly 20 projects in backlog.

• The sales pipeline now stands at >$200mm.

• Yet to fully realize on recent sales team additions.


$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

Backlog Bookings

Source: Company reports, Beacon Securities

Recurring Revenues Complement Project Growth

• An important revenue base comes from what the company terms Specialty Products & Services

(SP&S). These are generally consumable components (filters, couplings and chemicals) that

global water treatment customers are required to purchase on an on-going basis.

• This division has largely been built by acquiring existing companies. H2O purchased Professional

Water Technologies (PWT) in mid-2009 for approximately US$3.7mm. PWT offers chemicals

used in water treatment facilities, including anti-scalants, dispersants, and membrane cleaners.

HEO recently announced that PWT has increased the size of its warehouse facility in California

by 60% and that year-to-date revenues are up 21% as HEO gains market share.


• H2O purchased Piedmont Pacific at the end of 2013 for

US$3.8mm. Piedmont designs and supplies couplings,

gaskets, nuts and bolts that can withstand high operating

pressures and highly corrosive environments. These

couplings are used around the world in some of the

largest water treatment facilities.

• Gross profit from SP&S covers ~90% of company SG&A

• Q3 revenues are seasonally strong due to Maple

contribution.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000 SP&S Sales


Profitable Business Could Attract Take-Out Interest

14

• The water sector is a highly competitive space, with both small and large players havingidentified water as a growth sector.

• We believe that at some point consolidation activity with accelerate as global water solutioncompanies seek scale. The strong recurring revenue segment of H2O, coupled with a strong15-year project execution track record, is particularly attractive, in our opinion.

• In addition, H2O is profitable and trading at a discount to other public water peers.

• H2O does not have a controlling shareholder and therefore could be subject to a hostile bid.

• We believe management’s preference is to remain a stand-alone entity to take advantage ofthe market opportunities, and scale the business through organic and acquisitive growth.

• However, should take-out interest come along, we would expect HEO to attract a strongpremium to current valuation (see more in valuation section).

• The most recent transaction in the industry (Danaher buying Pall) was at a TTM EBITDAmultiple of >20x. The offer represented a 28% premium to the previous closing price.


Financial Results – Q3 Ending March 31st

15

• HEO Q3 results saw 23% y/y topline growth to $12.1mm. Recurring (SP&S) revenues made up

54% of total revenues and were up 21% y/y. Project revenues grew 26% y/y. SP&S revenues

are proportionally stronger in Q3 due to the seasonal influence of the Maple division. EBITDA

was $0.7mm, up 137% y/y. YTD, revenue growth stands at 21% and EBITDA is up 664% to

$2.1mm. In fact, YTD F2015 revenues have already surpassed full year 2014 results ($37.0 mm

vs $34.8mm).

• The bottom line was $150k or $0.01 per share. This compares to a $216k loss one year ago.

YTD earnings stand at $551k, or $0.03 per share (vs-$0.07 last year).


$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000 Sales

-$400

-$200

$0

$200

$400

$600

$800

$1,000 EBITDA


Financial Results (cont’d)

16

• The company finished Q3 with cash of $1.7mm and debt of $5.8mm. Net debt has been pretty

steady between $3.5mm and $5mm over the past couple of years. HEO has a bank operating

line of $7.0mm (@ P+1%), with $4.7mm outstanding. This includes a $2mm working capital

facility. The company also has bank overdraft and other debt of $1.1mm outstanding.

• H2O is well within compliance of its covenants, including debt to equity (<2.5x) and working

capital ratio (>1.3x)

• H2O carried a positive net working capital balance of $8.5mm as of the end of March.


• The company generated cash from operations of

$1.3mm YTD.

• Capex spending is minimal, with $0.8mm YTD (higher

than normal due to renovations in Victoriaville).

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000 Net Debt


Forecast Assumptions

• We believe H2O is at an inflection point for growth – with both the macro environment andcompany’s reach, expertise and reputation leading to increased demand for its products andservices.

• While management targets 10% annual organic growth, we think industry tailwinds due to theunprecedented drought conditions should lead to higher growth rates. We model organicgrowth of 14% in F2016 and 15% F2017 (June YE).

• We expect project work and SP&S revenues to grow at similar levels, with SP&S (recurringconsumables) to be ~42% of total revenues in each of the next two years.

• Project gross margins range from 15%-25%, while SP&S gross margins range from 40%-60%.We use the low end at roughly 17% and 42%, respectively, in our forecast. This provides blendedgross margins in the 26%-28% range.

• Management targets SG&A to be <20% of revenues, and we expect this to be achieved inF2017. We note near term profitability is impacted by increased costs as the sales team grows.

• HEO continues to look to expand its offerings, this could include operating treatment facilities onbehalf of municipalities in the future. This is not factored into our estimates. We believe ourforecasts could be bolstered by acquisition activity in the next two years.


Forecast & Outlook – June Fiscal Year End


• HEO targets $100mm in annual revenues in

the next 3-5 years, with EBITDA margin 8%+.

• This includes contribution from acquisitions.


$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000 Sales

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000 EBITDA

Initiating Coverage with a BUY and $2.25 Target

• With 50% upside to our 12-month target of $2.25, we are initiating coverage with a BUY rating.

• We use an 11x EV/EBITDA multiple on the average of our F2016/F2017 EBITDA (in effect calendar2016) estimates to reach our target. Peer comparables trade at a average of 11.3x 2016 EBITDA.HEO currently trades at 8.7x calendar 2016 EBITDA, an attractive valuation as compared to largerpeers.

• Our target equates to 0.9x calendar 2016 EV/Sales, while competitors currently trade at twice thismultiple. We believe profitability will grow as HEO grows and this gap will narrow.

• While there are no perfect direct comparables (system integrators with significant recurringconsumables business), we believe HEO is set to see multiples expand as investors understand themarket opportunity at hand. This should also help improve liquidity in the name.

• Ultimately, we believe that HEO is likely to become a take-out target by one of the largerinternational water players. The company provides a great platform entry into North America’swater treatment market, coupled with an international consumables business.

• Big water filtration player Pall Corp (PLL-NYSE; not covered) recently attracted a take-over offer atnearly 21x TTM EBITDA by science and technology giant Danaher Corp (DHR-NYSE; not covered).The median M&A transaction multiple in the water industry over the past three years is 13.3xEBITDA. We believe any take-out valuation for HEO would be well north of $2.00 per share.


Comparable Company Valuation Analysis


• There are several private competitors including Wigen Water Technologies (strong in Midwest US),

HARN R/O Systems (strong in Florida and the south), and FilterBoxx in Canada.

• The global water industry giants include names like Veolia, GE, Doosan, IDE Technologies and

Suez.

Source: FactSet, Beacon Securities

Year EndLast

Price

Enterprise

Value

(Millions)

Market

Capitalization

(Millions)

Dividend

YieldCFY NFY CFY NFY CFY NFY CFY NFY CFY NFY CFY NFY

H2O Innovation Inc. HEO-CA June $1.50 $35 $31 0.0% $47.8 $54.4 $2.4 $3.5 $0.02 $0.06 0.7x 0.4x 14.6x 10.1x 75.3x 25.4x

Ovivo Inc. Class A OVI.A-CA March $1.65 $94 $73 0.0% $303.9 $323.6 $13.5 $20.9 $0.06 $0.15 0.3x 0.3x 7.0x 4.5x 26.4x 11.0x

Pure Technologies Ltd. PUR-CA December $8.00 $382 $420 1.5% $109.2 $133.9 $22.2 $31.3 $0.19 $0.30 3.5x 2.9x 17.2x 12.2x 42.7x 26.5x

Pall Corporation PLL-US July $124.59 $13,605 $13,287 1.0% $2,816.1 $2,933.9 $665.2 $713.7 $3.76 $4.16 4.8x 4.6x 20.5x 19.1x 33.1x 30.0x

Xylem Inc. XYL-US December $36.99 $7,495 $6,720 1.5% $3,681.2 $3,850.9 $631.8 $688.5 $1.86 $2.10 2.0x 1.9x 11.9x 10.9x 19.9x 17.6x

Rexnord Corporation RXN-US March $25.77 $4,279 $2,621 0.0% $2,074.7 $2,173.2 $432.4 $451.0 $1.70 $1.92 2.1x 2.0x 9.9x 9.5x 15.1x 13.4x

Watts Water Technologies, Inc. Class AWTS-US December $55.00 $2,253 $1,564 1.2% $1,478.3 $1,476.3 $197.2 $222.4 $2.31 $2.78 1.5x 1.5x 11.4x 10.1x 23.8x 19.8x

Mueller Water Products, Inc. Class AMWA-US September $9.34 $2,006 $1,501 0.9% $1,211.2 $1,298.8 $193.0 $225.1 $0.42 $0.55 1.7x 1.5x 10.4x 8.9x 22.3x 16.9x

Calgon Carbon Corporation CCC-US December $21.15 $1,159 $1,118 0.9% $574.7 $627.7 $116.8 $131.5 $1.02 $1.26 2.0x 1.8x 9.9x 8.8x 20.8x 16.8x

Gorman-Rupp Company GRC-US December $26.88 $688 $706 1.5% $434.2 $426.0 $70.0 $68.4 $1.37 $1.37 1.6x 1.6x 9.8x 10.1x 19.7x 19.7x

PMFG, Inc. PMFG-US June $6.49 $116 $138 0.0% $158.6 $164.0 $0.3 $6.1 -$0.20 $0.10 0.7x 0.7x 364.3x 18.9x nmf 62.8x

2.0x 1.9x 47.2x 11.3x 24.9x 23.5x

1.8x 1.7x 10.9x 10.1x 22.3x 18.7xPeer Median

Company

Peer Average

Revenues EBITDA EPS EV/EBITDA Price/EarningsEV/Sales

Note HEO current fiscal year (CFY) ends June 30, 2015

Management and Board


H20 Innovation

Shares outstanding - basic 20,926,595

Options (out-of-the-money, avg $2.65) 300,000

Fully diluted share count 21,226,595

Institutional ownership 50%

Management and director ownership 18%


Key Risks To Our Analysis

• HEO bids water treatment projects on a fixed price basis. Profitability ultimately hinges on theability of management to properly bid and execute contracts. The company faces directcompetition from smaller, private firms but also from large, international players. The market iscompetitive and failure to execute could damage the H2O brand.

• Project timelines are subject to customer changes and delays. Municipalities are also limited byavailable capital to undertake large infrastructure projects. This can result in lumpy orders and salesrecognition.

• Significant growth is anticipated in drought stricken regions, where water reuse and desalinationplants are being proposed/developed. Improved water reserves thanks to rainfall could lead to areduction in demand for new desal and water reuse systems.

• Growth is likely to include M&A activity and valuation and integration of new assets will beimportant. Acquisitions are likely to require additional capital.

• With significant USD revenues, HEO is exposed to currency translation impacts. This is somewhatoffset by a natural hedge of USD cost labour and equipment.

• Technology and regulatory shifts could negatively impact the target market and/or the productofferings of HEO.

• Key personnel are the life-blood of this business. The loss of one or more key executives or salesprofessionals is likely to negatively impact operations.


May 26, 2015 Michael Mills | 902.425.8897 | [email protected]

H2O Innovation

Year End: June FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(CAD $000s)

Revenue 27,728 28,798 35,910 36,137 34,832 47,775 54,405 62,566

Cost of Sales 20,722 20,232 27,635 26,885 25,581 34,647 39,422 45,335

Gross Profit 7,006 8,566 8,275 9,252 9,250 13,128 14,983 17,231

Gross margin 25.3% 29.7% 23.0% 25.6% 26.6% 27.5% 27.5% 27.5%

Total operating expenses 15,912 8,819 16,707 7,777 9,193 10,704 11,476 12,523

EBITDA -2,137 145 -480 1,475 58 2,424 3,507 4,708

EBITDA margin -7.7% 0.5% -1.3% 4.1% 0.2% 5.1% 6.4% 7.5%

Depreciation 290 307 306 280 294 394 481 481

Amortization 1,391 1,066 614 721 951 865 899 899

EBIT & other expenses -10,588 -1,626 -9,352 474 -1,187 1,165 2,127 3,328

EBT -12,166 -2,153 -10,562 146 -1,759 575 1,634 2,928

Tax Expense (future) -2,169 -536 -2,507 -167 -303 161 409 732

17.8% 24.9% 23.7% -114.7% 17.2% 27.9% 25.0% 25.0%

Shares Outstanding (FD) 55,160 60,136 60,146 60,146 87,157 20,927 20,927 20,927

EPS (FD) -0.18 -0.03 -0.13 0.01 -0.02 0.02 0.06 0.10

Year End: June FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(CAD $000s)

Assets

Cash & equivalents 2,672 465 577 304 498 3,003 4,353 5,287

Held for trading investments 1,267 1,413 0 0 0 0 0 0

Accounts receivable 4,857 8,413 9,322 6,469 8,908 9,456 9,751 11,214

Deposit certificates 0 0 1,148 1,254 1,225 1,248 1,248 1,248

Inventories 1,915 2,281 2,251 4,017 4,706 3,084 3,509 4,036

Prepaid expenses 308 199 132 225 452 331 331 331

Costs incurred in excess of billings 0 0 2,154 2,203 2,068 3,592 3,592 3,592

Work in process 2,149 2,332 0 0 0 0 0 0

Total Current Assets 13,169 15,103 15,584 14,472 17,857 20,713 22,784 25,707

Other assets 44 42 43 38 45 61 61 61

Goodwill 10,901 10,690 2,386 2,465 4,010 4,760 4,760 4,760

Intangible assets 10,314 8,374 5,459 4,943 6,837 7,710 7,710 7,710

Property, plant and equipment 2,451 2,333 2,027 1,879 1,874 2,778 1,899 1,119

Future income taxes 47 681 2,970 3,124 2,801 3,112 3,112 3,112

Total Assets 36,926 37,223 28,470 26,921 33,425 39,134 40,326 42,469

Liabilities and Shareholders' Equity

Bank overdraft 0 292 155 257 113 0 0 0

Bank loan 0 1,579 2,868 3,376 3,556 4,518 3,718 2,718

Accounts payable & accrued liabilities 4,815 5,329 5,742 4,080 4,417 5,551 6,316 7,264

Provisions 0 0 41 42 77 82 82 82

Billings in excess of work in process 234 1,311 1,635 1,758 1,492 1,452 1,452 1,452

Current portion of LTD 620 319 2,581 2,808 725 436 436 436

Income tax liabilities 0 18 4 2 37 15 15 15

Contingent consideration 0 0 21 0 0 0 0 0

Deferred rent 0 0 18 3 11 7 7 7

Total Current Liabilities 5,669 8,848 13,065 12,327 10,430 12,061 12,026 11,974

Long-term loans and borrowings 1,569 3,225 1,102 65 331 475 475 475

Contingent considerations 0 0 461 0 0 0 0 0

Convertible debenture 1,355 0 0 0 0 0 0 0

Defered rent 57 38 97 102 103 119 119 119

Total Liabilities 8,649 12,111 14,725 12,494 10,864 12,655 12,620 12,568

Share capital 46,160 45,866 45,852 45,852 55,299 55,299 55,299 55,299

Stock options reserve 0 0 1,821 1,861 1,874 1,876 1,876 1,876

Warrants reserve 0 0 370 142 0 0 0 0

Contributed surplus 11,453 11,879 0 0 0 0 0 0

Retained earnings (deficit) -29,337 -30,636 -32,827 -32,285 -33,600 -33,186 -31,960 -29,764

Accumulated other comprehensive loss 0 -1,997 -1,473 -1,143 -1,012 2,490 2,490 2,490

Total Shareholders' Equity 28,277 25,112 13,744 14,427 22,561 26,479 27,705 29,901

Total Liabilities and S.E. 36,926 37,223 28,469 26,921 33,425 39,134 40,326 42,469

Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830 |www.beaconsecurities.ca

Disclosure Requirements

Does Beacon, or its affiliates or analysts collectively, beneficially own 1% or more of any class of the issuer's equity securities? Yes No

Does the analyst who prepared this research report have a position, either long or short, in any of the issuer’s securities? Yes No

Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No

Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received

remuneration for any services provided to the securities issuer during the preceding 12 months?

Yes No

Has Beacon Securities performed investment banking services in the past 12 months and received compensation for investment banking

services for this issuer in the past 12 months? Yes No

Was the analyst who prepared this research report compensated from revenues generated solely by the Beacon Securities Investment

Banking Department? Yes No

Does any director, officer, or employee of Beacon Securities serve as a director, officer, or in any advisory capacity to the issuer? Yes

No

Are there any material conflicts of interest with Beacon Securities or the analyst who prepared the report and the issuer? Yes No

Is Beacon Securities a market maker in the equity of the issuer? Yes No

Has the analyst visited the head office of the issuer and viewed its operations in a limited context? Yes No

Did the issuer pay for or reimburse the analyst for the travel expenses? Yes No

All information contained herein has been collected and compiled by Beacon Securities Limited, an independently owned and operated

member of the Investment Industry Regulatory Organization of Canada (IIROC). All facts and statistical data have been obtained or

ascertained from sources, which we believe to be reliable, but are not warranted as accurate or complete.

All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon

Securities Limited takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses

resulting from investment decisions based on the content of this report.

This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell securities discussed herein.

Based on their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all

investors in all countries.

Dissemination

Beacon Securities distributes its research products simultaneously, via email, to its authorized client base. All research is then available on

www.beaconsecurities.ca via login and password.

Analyst Certification

The Beacon Securities Analyst named on the report hereby certifies that the recommendations and/or opinions expressed herein accurately

reflect such research analyst’s personal views about the company and securities that are the subject of the report; or any other companies

mentioned in the report that are also covered by the named analyst. In addition, no part of the research analyst’s compensation is, or will

be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.

http://www.beaconsecurities.ca/

0 $1 - beacon securities · 2017-02-25 · fy15e fy16e fy17e ev/sales 0.7x 0.7x 0.6x ev/ebitda...

Documents