Pure Technologies Ltd.

Transcription

1 12 July 2016 Special Situations Pure Technologies Ltd. Introducing Pure as Top Pick for H216 PUR-TSX: $5.95 Buy $7.25 Target We are pleased to introduce Pure Technologies ( PUR, Pure, or the Company ) as one of Echelon Wealth Partners research top picks for H216. Investment Thesis: As we expanded in our initiation note (initiating note - April 12, 2016), we see the recent share price weakness (down 31% from its March 2015 high) as an opportunity to consolidate a position in a dominant player supported by industry tailwinds. We attribute the underperformance to lacklustre results through 2015 marked by various concerns, namely the postponement of several anticipated large projects, combined with a temporary slowdown in the recently acquired Wachs Water Services ( WWS or Wachs ) core business, resulting in revenue that was below expectations with consequent margin compression; we view these as short-term and non-recurring issues that have no bearing on our long-term bullish thesis. We urge investors to shrug off the short-term disappointments in favour of the long-term business fundamentals. Given the lumpy nature of the business quarter to quarter, we take a longer-term view when evaluating the merits of an investment in Pure. Namely, in our Target Scenario we see revenue CAGR of 21.4% through 2018 together with considerable operating leverage, driving an impressive 38.8% EBITDA CAGR during the same period. We believe that the Company has a dominant position in a high barrier to entry business, helping sustain its revenue growth and margin profile going forward. Catalysts and Drivers: We believe share performance will be driven by the Company s quarterly execution in light of last year s missteps. Specifically, we look for: Strong organic growth performance, specifically in Q316 and Q416: We look for 20%+ organic growth rates in the latter quarters of the year (5% ahead of Street estimates) confirming continued traction at PureHM and a turnaround of WWS performance. Q116 sales at PureHM were $4.7M, up from $1.4M last year driven by increased work in the US and increased product acceptance for both the Spectrum XLI and SmartBall technologies for the oil and gas sector. Wachs performance seems to have stabilized in Q116 with revenues coming in at $4.2M ($4.3M in Q415), which should come as a relief to investors. We now look for Wachs to contribute to growth. Considerable margin expansion from current levels: Given the high fixed structure, the second half of the year seasonality imbedded in the business, and good cost control, we see considerable operating leverage going forward. Namely, our Adjusted EBITDA margin expands from 4.4% in Q116 to 21.4% in Q416. We believe delivery of such results will go a long way in restoring the Company s premium valuation. Valuation: Pure trades at 11x 2017 EBITDA. Our $7.25 PT implies a 2017 EBITDA multiple of 13x, below the Company s historical forward multiple of 14x. Given the significant operating leverage and the long-term secular growth trends Pure is exposed to, we opt for a DCF analysis with an 11% discount rate and a 4% GRIP (implied exit multiple of 7.5x) to derive our valuation. Our bullish thesis is supported by robust downside protection (-27%) relative to attractive upside potential (24% for our target case and 57% for our upside case). Projected Total Return: 23.9% Valuation: DCF (11.0% discount, 4.0% GRIP) Market Data Market Capitalization Net Cash 9.8 Enterprise Value Basic Shares S/O 53.7 Fully Diluted Shares S/O 53.9 Avg. Daily Volume (K) Week Range $ $7.39 Dividend Yield 2.0% Revisions Current Old 2016E Revenue NA 2016E ADJ. EBITDA 22.2 NA 2016E ADJ. FD EPS $0.13 NA Financial Metrics FYE Dec A 2016E 2017E 2018E Revenue Growth y/y 34.2% 25.7% 19.2% 19.2% ADJ. EBITDA M argin 12.7% 16.9% 18.1% 19.0% ADJ. EPS FD Growth y/y NA NA 94.5% 45.0% Valuation Data FYE Dec A 2016E 2017E 2018E EV/Sales 3.0x 2.4x 2.0x 1.7x EV/ADJ. EBITDA 23.4x 14.0x 11.0x 8.8x P/E NA 46.6x 23.9x 16.5x Quarterly Data Q1 Q2 Q3 Q4 Rev. ' Rev. ' EBITDA ' EBITDA ' FD EPS ' FD EPS ' Company Description Pure Technologies Ltd. is engaged in development and application of technologies for inspection, monitoring and managing physical infrastructure, including water and hydrocarbon pipelines, buildings and bridges. The Company's main business streams include sale of monitoring systems; technical services utilizing pipe line inspection, leak detection and condition assessment technologies, and specialized engineering services. The Company is based in Calgary, AB. $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 Volume (mm) Price $0.00 Jul-15 Oct-15 Jan-16 Apr Page 1 of 6

2 Exhibit 1 DCF Analysis and Sensitivity Analysis Source: Echelon Wealth Partners Inc. Page 2 of 6

3 Aug-14 Sep-14 Oct-14 v-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 v-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Jun-16 Jul-16 Aug-14 Sep-14 Oct-14 v-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 v-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Jun-16 Jul-16 Stock Price ($) Pure Technologies Ltd. (PUR-TSX) July Pure Technologies Ltd. (PUR-T, $5.95) - Data Sheet BUY PT: $7.25 $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 Last Sale Price 50-Day MA 200-Day MA $ $2.00 $ $ Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun Volume (M Shares) Company Description Consensus 3 Mths Ago Current Return Pure Technologies Ltd. is engaged in development and application of technologies for inspection, monitoring and managing physical infrastructure, including water and hydrocarbon pipelines, buildings and bridges. The Company's main business streams include sale of monitoring systems; technical services utilizing pipe line inspection, leak detection and condition assessment technologies, and specialized engineering services. The Company is based in Calgary, AB. Rating: Buy Buy Target: $7.38 $ % Median: $7.38 $ % High: $8.00 $ % Low: $7.00 $ % Consensus Distribution Sector Outperform/Buy 5 Sector Perform/Hold 0 Sector Underperform/Sell 0 # Estimates 5 Historical Valuation 20.0x 15.0x 10.0x 5.0x NTM EV/EBITDA 120.0x 100.0x 80.0x 60.0x 40.0x 20.0x 0.0x NTM P/E Key Financial Metrics Financial Summary 2015A Q116A Q216E Q316E Q416E 2016E 2017E 2018E Key Statistics Value Revenue Week High $ % Growth y/y 34.2% 71.3% 5.3% 23.8% 25.4% 25.7% 19.2% 19.2% 52-Week Low $3.80 (36%) Cons Avg Vol (3-Mo) 45k Cons. 3 Mts. Ago Shares Outstanding (FD) 54 Adjusted EBITDA Market Cap $ Margin 12.7% 4.4% 17.0% 20.7% 21.4% 16.9% 18.1% 19.0% Net Debt (Net Cash) -10 Cons Enterprise Value $ Cons. 3 Mts. Ago Div Yield 2.0% Diluted Adj. EPS FYE Dec 31 Growth y/y NA NA 30% 342% 300% NA 94% 45% Employees ~500 Cons NA Cons. 3 Mts. Ago Top Ownership M Shares 6 Mnths % Held Segmented Sales 2015A Q116A Q216E Q316E Q416E 2016E 2017E 2018E Pictet Asset Management Limited % Equipment sales Asset Management L.P % Growth y/y -56% -81% -80% 5% 5% -54% 8% 8% Gilder Gagnon Howe & Co. Llc % % Total Sales 7% 2% 2% 4% 3% 3% 2% 2% Cibc Asset Management Inc % Inspection and consulting services Pembroke Management Ltd % Growth y/y 68% 101% 17% 25% 25% 32% 20% 20% Calvert Investment Management, Inc % % Total Sales 84% 87% 88% 87% 89% 88% 89% 89% Telemark Asset Management, Llc % Monitoring, licensing and technica Kleinwort Benson Investors Dublin Ltd % Growth y/y 11% 79% 5% 22% 40% 31% 15% 15% % Total Sales 9% 12% 10% 9% 8% 9% 9% 9% Total Sales Growth y/y 34% 71% 5% 24% 25% 26% 19% 19% % Total Sales 100% 100% 100% 100% 100% 100% 100% 100% Return EV / Sales EV / EBITDA P / E LTM EBITDA Rev. Growth Dividend LTM 1 Week 1 Month 3 Month YTD 1 Year LTM NTM LTM NTM LTM NTM Margin 2016E Yield ROE Water Technology Comps American Water Works Company, I (2.0%) 6.4% 17.6% 38.0% 62.4% 6.7x 6.4x 14.0x 13.1x 31.3x 28.9x 47.8% 6.4% 1.8% 9.5% Pentair plc 5.9% 4.9% 20.5% 25.8% (2.5%) 2.4x 2.4x 13.6x 12.6x NM 14.5x 17.7% 3.3% 2.1% (1.8%) Xylem Inc. 4.6% 2.2% 13.8% 28.6% 32.6% 2.5x 2.4x 14.9x 13.5x 24.5x 21.9x 16.3% 2.6% 1.3% 16.5% Aqua America Inc. (2.7%) 1.6% 9.2% 15.3% 35.2% 9.7x 9.4x 18.9x 16.3x 29.9x 26.1x 55.6% 2.6% 2.1% 11.9% Flowserve Corp. 1.8% (9.0%) 9.4% 10.0% (6.1%) 1.6x 1.8x 9.9x 11.1x 21.8x 17.8x 16.2% -10.9% 1.7% 16.1% IDEX Corporation 3.1% (1.4%) 3.9% 10.6% 9.8% 3.5x 3.3x 13.9x 13.4x 22.8x 22.1x 25.3% 4.8% 1.6% 19.4% Watts Water Technologies, Inc. 5.2% 6.0% 12.3% 22.7% 21.2% 1.6x 1.7x 17.0x 11.2x NM 21.9x 9.7% -3.6% 1.2% (13.7%) Mueller Water Products, Inc. 3.8% 4.1% 21.6% 37.6% 34.1% 2.0x 1.9x 12.1x 10.7x 31.6x 22.4x 16.5% 1.2% 1.0% 17.3% Itron, Inc. 0.9% (0.9%) 9.3% 20.6% 36.5% 1.0x 1.0x 13.7x 9.8x 130.4x 20.3x 7.4% 2.3% - 2.3% Hyflux Ltd (2.4%) 5.3% 1.7% 6.2% (29.8%) 2.8x 3.0x 18.2x 18.7x NM 46.2x 17.4% 29.4% 2.9% 3.7% Badger Meter Inc. 3.5% (0.2%) 15.7% 27.4% 16.9% 2.9x 2.7x 16.2x 16.0x 35.9x 30.3x 17.6% 9.9% 1.1% 13.1% Aegion Corporation 4.9% 2.9% (1.1%) 5.6% 13.8% 0.7x 0.7x 7.9x 7.0x NM 14.7x 9.0% -3.5% - (2.2%) Lindsay Corporation 1.4% (4.2%) 1.4% (4.3%) (18.7%) 1.5x 1.5x 17.6x 12.3x 84.7x 27.0x 8.7% -11.2% 1.6% 3.3% Median 2.5% 1.4% 1.6% 5.9% (2.4%) 2.1x 2.1x 16.9x 14.1x 60.3x 28.7x 13.2% 3.2% 1.3% 3.5% Pure Technologies (Street) (3.1%) 2.4% 30.5% 27.4% (13.1%) 2.7x 2.4x 22.7x 13.2x NM 40.1x 11.9% 21.7% 2.0% (0.2%) Source: Echelon Wealth Partners, Company Reports and Filings, Capital IQ Page 3 of 6

4 Important Information and Legal Disclaimers Echelon Wealth Partners Inc. is a member of IIROC and CIPF. The documents on this website have been prepared for the viewer only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. Echelon Wealth Partners Inc. cannot accept any trading instructions via as the timely receipt of messages, or their integrity over the Internet, cannot be guaranteed. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. 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U.S. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Echelon Wealth Partners Inc. is not registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. ANALYST CERTIFICATION Company: Pure Technologies Ltd. PUR:TSX I, Amr Ezzat, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. IMPORTANT DISCLOSURES Is this an issuer related or industry related publication? Does the Analyst or any member of the Analyst s household have a financial interest in the securities of the subject issuer? If Yes: 1) Is it a long or short position? Yes; and, 2) What type of security is it? Common shares Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer? Does Echelon Wealth Partners Inc. or the Analyst have any actual material conflicts of interest with the issuer? Does Echelon Wealth Partners Inc. and/or one or more entities affiliated with Echelon Wealth Partners Inc. beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer? During the last 12 months, has Echelon Wealth Partners Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering, or private placement of securities of this issuer? During the last 12 months, has Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer? Has the Analyst had an onsite visit with the Issuer within the last 12 months? Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months? Has the Analyst received any compensation from the subject company in the past 12 months? Is Echelon Wealth Partners Inc. a market maker in the issuer s securities at the date of this report? Issuer Yes Page 4 of 6

5 RATING DEFINITIONS Buy Speculative Buy Hold Sell Under Review Tender Dropped Coverage The security represents attractive relative value and is expected to appreciate significantly from the current price over the next 12 month time horizon. The security is considered a BUY but in the analyst s opinion possesses certain operational and/or financial risks that are higher than average. The security represents fair value and no material appreciation is expected over the next month time horizon. The security represents poor value and is expected to depreciate over the next 12 month time horizon. While not a rating, this designates the existing rating and/or forecasts are subject to specific review usually due to a material event or share price move. Echelon Wealth Partners recommends that investors tender to an existing public offer for the securities in the absence of a superior competing offer. Applies to former coverage names where a current analyst has dropped coverage. Echelon Wealth Partners will provide notice to investors whenever coverage of an issuer is dropped. RATINGS DISTRIBUTION Recommendation Hierarchy Buy Speculative Buy Hold Sell Under Review Restricted Tender Number of recommendations % of Total (excluding Restricted) 46% 34% 12% 1% 6% Number of investment banking relationships % of Total (excluding Restricted) 40% 35% 10% 0% 15% PRICE CHART, RATING & PRICE TARGET HISTORY Pure Technologies Ltd. (TSX:PUR) $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Jul 13 v 13 Mar 14 Jul 14 v 14 Mar 15 Jul 15 v 15 Mar 16 Date Target (C$) Rating 12 Apr 2016 $7.00 Buy 5 May 2016 $7.25 Buy Price Target (C$) Coverage Initiated: Apr 12, 2016 Data sourced from: Capital IQ Page 5 of 6

6 Toronto Wealth Management 1 Adelaide Street East, Suite 2000 Toronto, ON M5C 2V Montreal Wealth Management and Capital Markets 1501 McGill College Ave., Suite 1450 Montréal, Québec H3A 3M Vancouver Wealth Management and Capital Markets 1055 Dunsmuir St. Suite 3424; P.O Box Vancouver, BC V7X 1K Toronto Capital Markets 130 King Street West, Suite 2500 Toronto, Ontario M5X 2A Ottawa Wealth Management 360 Albert Street, Suite 800 Ottawa, ON K1R 7X Victoria Wealth Management 730 View Street, Suite 210 Victoria, BC V8W 3Y Montreal Wealth Management 1000 De La Gauchetière St. West, Suite 1100 Montréal, QC H3B 4W Calgary Wealth Management 350-7th Avenue SW, 19th Floor Calgary, AB T2P 3N Oakville Wealth Management 1275 rth Service Road, Suite 612 Oakville, ON L6M 3G Tokyo Capital Markets Holland Hills Mori Tower ; RoP # Toranomon, Minato-Ku, Tokyo, , Japan Page 6 of 6