H2O Innovations (TSE:HEO) is a water technologies and services company that is based out of Quebec City, Quebec and was established in 2000. It provides custom engineered water systems for its customers across the US and Canada. Rarely do we think about the various water systems that are utilized by both private and public entities. H2O Innovations provides systems that provide solutions for drinking water, waste water, water reuse and recycling, and the desalination of sea and brackish waters.
Currently, the company has a majority of its outstanding contracts based in the US, with a foothold as a water services leader in states like Texas and New York. These contracts create what is known in the financial world as recurring revenues. When infrastructure and technology is implemented, customers pay a monthly, quarterly, or annual subscription fee for the services, maintenance, and parts of the system. It is an ideal way to structure a business as capital inflow becomes predictive and reliable, which allows the company to reinvest in other aspects of the business.
What Sets H2O Innovation Apart?
H2O Innovation has novel technology that includes its FiberFlex line of products that are built upon a generic platform that can easily be integrated into other systems. The flexibility makes it an innovative system that is friendly to both engineers and users. On top of this, the company also implements other technologies like Nanofiltration, Reverse Osmosis, Greensand Filters, Ion Exchange, and Ultraviolet Disinfection.
Its vast portfolio of technology has allowed H2O Innovation to be used in multiple different industries. It’s not just sprinkler systems that the company installs! H2O Innovation helps companies turn plants into biofuels, provide clean water for food and beverage producers, helps to allow for safe and sustainable mining expeditions, and energy solutions like power generation and oil and gas production.
On top of its cutting-edge technologies, H2O Innovation has also designed a digital platform for its customers. From this platform H2O Innovation can extract valuable data from the Intelogix data analytics system. Everything is now automated and acts as both a system performance monitor as well as a maintenance minder. H2O Innovation can run reports on its active systems which helps allow the company to provide the best customer support for its users.
Is H2O Innovation a good investment?
The product and services are providing an excellent recurring revenue stream for the company. This resulted in a near 32.6% year-over-year revenue growth from 2021 for the most recent quarter. Some red flags also appear on its balance sheet though. Declining profit margins over the trailing twelve-month period suggest that higher costs are affecting the company’s bottom line. This could have to do with H2O Innovation scaling its business as it attracts more customers. Net earnings and EBITDA also declined during that period, although this was likely affected by the acquisition of two new brands. On the bright side, H2O Innovation has a backlog of more than $108 million in projects and contracts.
In terms of the industry, rising raw material costs have sharply affected margins. Rising inflation has also dampened the economic output and rising interest rates have dampened its forward-looking revenue multiple potential. Still, H2O Innovation’s growth is apparent and it is clear that like many companies, the current economic environment is causing some issues. Over the long term, H2O Innovation should continue to rely on its recurring revenue model, which will keep cash flowing into the company as it re-invests into the growth of the business.