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Xebec 1Q21 results, Clearway OMIB plus inflation thoughts ?3

09:43 13-May-21

The Xebec call has concluded and there are a lot of moving parts.  To me the two most important notes are Biostream production details, which will be advancing to about 1 Biostream per week next year, at 1.5 to 1.7M each.  11 units are currently in production, with 4 under contract, but Xebec is also seeing price pressure on every commodity, with quote validity decreased to as little as 2 days, from a typical 30-60 days.  It is passing increases to new customers, and including commodity clauses in contracts, but I think it's critical to grow the business to the point where it can hedge commodity costs.

The second note is that growth efforts are being supported by services revenue from the Industrial segment, which had 10% organic growth and should accelerate with improving margin going forward.  This does not show in the backlog, which decreased.  Even here we see expansion with 13-15M of CapEx for this year as demand expands outside of RNG.  Oxygen for the pandemic is one example, and the company is also doing CAD1M of helium related business per month, with 20 new projects underway.

Looking forward, 3 more acquisitions are in a "very advanced state" and the company expects to make a new COO announcement next week, which should help it manage all this.  The market is clearly having difficulty parsing the data, with XEBEF opening down 5%, but to me it looks like typical and expected growing pains.  The company remains ideally positioned for the energy transition, though we'll have to wait on American policy and integration efforts.

Finally, I apologize for the duplicate emails earlier, which was due to operator error :-/  I'll be happy when earnings season is over and I can get back to more real research.

Xebec has published its first quarter results:

• a loss of 6 Canadian cents per share misses by 2 cents
  
• from CAD20.6M of revenue, which misses by CAD1.8M
  

Management maintained FY guidance, which implies acceleration in the second half.  It says Xebec delivered its first 2 Biostream containerized units during the quarter.  Four more are on the way in the next 5 months, but production capacity is just 2 per month.  Still, revenue nearly doubled YoY, and the company is about a fifth of the way through its acquisition strategy.  So, expect continued top line growth and subpar bottom line results as it optimizes processes across the business.  The conference call is at 8:30 and I am likely to write more. 

In the meantime, I will also document an open market insider buy of 2K shares at $24.55 by Clearway's CEO, increasing his stake by about 8%.  I'd already written about nibbling on continued declines in the stock in conjunction with the last report.

The paradox of inflation causing the recent market reality check is that it forces more investment, just as the Fed wants.  I've long expected this, and it coincides with the realization that we've probably seen the last of the direct stimulus payments, making matter worse for the short term.  I further argue that inflation will be sustained, which should cause the Fed to taper toward year-end, resulting in another, more durable market tantrum.  However, we're already seeing that such moves hit riskier assets more, making this one of the opportunities I've been waiting on to shift further into higher quality names that I've added in recent months like TU, PPL, and DOX. 

I continue to think that trading firms like Virtu and especially BGC Partners benefit most, and are being underappreciated in the current turmoil as well.  I suppose it's also worth noting that AES is getting in on the energy trading action with Fluence.  That's in Australia, for now, but the country looks like a model for much of the Western world going forward.

Over the longer term, the budget deficit growing to a record $1.9 trillion is another step toward the shift away from American dollars and markets.  However, TU and DOX already cover that angle, along with EBIX.  The dollar actually strengthened a bit on yesterday's news, which was one of the points leading me to believe the current market move is ephemeral.  A real tipping point is still seems years off, and by then Xebec should have a similar profile, if it remains a separate company at all.  Inflation applies most clearly to commodities like natural gas, and unlike companies further down the supply chain, Xebec benefits from rising gas prices.

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