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Xebec 2Q21 results +3

09:53 12-Aug-21

The Xebec conference call has just concluded.  Many questions focused on hydrogen and other business segments, but to me it seems clear that the company's success currently hinges on Biostream.  Customers focusing on on-time installation and reliable service.  Term for the latter have been finalized and agreements are now being offered.  Most crucially, the production increase to 30-40 units should be mostly complete by the end of this quarter.  Interest from third-parties on reselling was also mentioned, but management sees its growing service network as a key differentiator and source of recurring revenue, but that will require training.

One other note is that Xebec no longer controls its Chinese hydrogen JV due to equal board representation, despite 60% equity.  The company is therefore now accounting for it as an investment.

Finally, on my point below, one of the earliest questions coming from many sources was on a U.S. listing.  Management could not provide a time frame, but expects to make such a move when American revenues ramp, along with a change in accounting currency to USD.  Thus, I expect such a move is many months off, at best.  Accordingly, XEBEF is now down 10% in early trading, whereas XBC has been down slightly less on the Toronto exchange. 

I'd characterize either as an opportunity with an expectation for more Biostream orders and production capacity next year.  However, American investors may be faced with some tough choices on holding over the counter shares through volatility, even though I do expect that to be short term.  For the long term, I continue to see plenty of growth potential and think the company is making the right moves.

Xebec has published its second quarter results:

• a loss of 5 Canadian cents per share misses by 3 cents
• from CAD32.7M of revenue, which beats by $3.9M

Revenue for the quarter was a new record.  However, management also updated its Adjusted EBITDA projection to -3.5+/-0.5% from +3.5+/-0.5% due to more growth investment and lower RNG project gross margin.  I'm prepared to overlook the first as normal growing pains; Xebec has increased production to 30 to 40 Biostream units per year and is investigating more capacity in the U.S.  The latter issue seems to be from legacy RNG projects whose impact should decrease going forward.  A special advisor to the company over the past two years has also been permanently added to the board.

Management foresees favorable regulatory backdrop for its products, across the globe.  In particular, the Agriculture Environmental Stewardship Act, introduced in both the Senate and House, provides a 30% tax credit to offset investment costs in systems such as Biostream.  Longer term, a framework to help producers to generate and sell carbon credits by setting up a third-party certification process through the USDA has passed the Senate at the end of June and has numerous bipartisan cosponsors in the House.  Xebec sees a targetable market of about 6,859 dairy, poultry, and swine farms in America.  The company has started to see significant improvements in economies of scale as it prepares for assembly of the second-generation Biostream.

I've also seen stock brokerages pass on some pressure from the SEC regarding ownership of OTC stocks.  So far we haven't seen XEBEF de-correlate from XBC shares at all, but it is a concern.  Neither has traded meaningfully in the pre-market so far.  The conference call is at 8:30; more after that.

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