H2O Innovation Inc

H2O Innovation Inc (TSXV: HEO) designs and provides integrated water treatment solutions based on membrane filtration technology. The company operates through three segments: Water Technologies and Services, Specialty Products, and Operation and Maintenance Services.

Why Should Investor’s Book Profit?

• Underperforming Industry peers on margin front: The company’s reported margin in the quarter just gone by was significantly below the industry median, with Gross margin of 28.4%in Q3FY21 vs. industry median of 36.4%, EBITDA margin of 8% vs. Industry median of 15.9%, and Net margin of 1.6% vs. industry median of 7.9% respectively. This implies lack of competitive edge for HEO shareholders against the competition.

• Hovering near supply zone: HEO shares are hovering near crucial resistance level; in the past multiple times the stock has witnessed profit booking near the current trading level. A potential correction is possible from the current trading level in next few trading sessions.

Technical price chart (as on January 04, 2022). Source: REFINITIV, Analysis by Kalkine Group

• Overvalued: From TTM Price to Cash Flow multiple standpoints, HEO shares are significantly overvalued against the industry peers. HEO shares TTM Price/Cash Flow ratio stood at 51.86x, whereas industry average multiple of 31.55x, despite the company has no competitive strength against its peers.
  

Stock recommendation

Despite lack of any competitive strength, HEO shares are significantly overvalued when compared with peer’s valuation. Moreover, amid rising uncertainties in the market on the back of surge in new COVID-19 variant cases could penalize overvalued stocks deeply. Also, given the penny market categorization of the stock, investors are exposed to relatively higher risk.  Profit booking would be wise move amid current uncertain market condition as stock is hovering near its crucial resistance level. Hence, we recommend a “Sell” rating on HEO stock at the current market price of CAD 2.81 at 9:45 am Toronto time (as on January 05, 2022).

1-Year price chart (as on January 05, 2022). Source: REFINITIV, Analysis by Kalkine Group.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.