KeyStone’s Stock Talk Show, Episode 229.


We have a busy show for you this week, returning from our research trip to LA. I begin with great news of a takeover bid for H2O Innovation Inc. (HEO:TSX), a company that has been in our Canadian Small-Cap Growth Stock Focus Buy Portfolio since August 2019 when it was recommended at $1.16.  H2O is a strong growing, unique water solutions company. This past week, a New York based private equity firm, announced a takeover transaction at a price of $4.25 per share, representing a premium of 68% to the prior closing price and a gain of 266% from our initial recommendation price. The bid will likely be an excellent exit point for clients in a tough market. Aaron has put together some comments on the Bond sell off with the U.S. Federal Reserve has signaling that rates may remain high for longer as economic growth and the job market continues to be robust and inflation remains above target. Brett takes a look at the curious case of Velan Inc. (VLN:TSX), which operates a rather non-eventful business as a producer of highly engineered industrial valves for the oil and gas, nuclear power and other industries.  This year the company’s shares have been on a roller coaster ride, jumping over 100% in February on a takeover bid only to fall right back to earth this past week as the bid was scuttled by the French government rejecting the acquisition because commitments to reduce all risks associated with the deal were not sufficient by the parties involved. Brett reviews the curious case and whether Velan’s shares which trade at less than half the bid price are an opportunity. Finally, Brennan reviews RE Royalties Ltd. (RE:TSX-V) a company we sat down with last week at a conference in California. RE acquires revenue‐based royalties from renewable energy generation facilities by providing a non‐dilutive royalty financing solution to privately held and publicly traded renewable energy generation and development companies. The stock pays a 6.4% dividend and Brennan gives you an overview of the business and our current thoughts.


Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett, with Brennan.


H2O Innovation Inc. (HEO:TSX)

Price: $4.17

Market Cap: $375.33 Million


Company Description: H2O Innovation is a water solutions company focused on providing best-in-class technologies and services to its customers in three areas Water Technologies & Services (WTS) applies membrane technologies and engineering expertise to deliver equipment and services to municipal and industrial water, wastewater, and water reuse customers, ii) Specialty Products (SP) is a set of businesses that manufacture and supply a complete line of specialty chemicals, consumables and engineered products for the global water treatment industry, and iii) Operation & Maintenance (O&M) provides contract operations and associated services for water and wastewater treatment systems.


Event: On October 03, 2023, H2O announced it had entered into a definitive arrangement agreement with Ember SPV, an entity controlled by funds managed by Ember Infrastructure Management, LP, a New York-based private equity firm, at a price of $4.25 per share, representing a premium of 68% to the prior closing price and a gain of 266% from our initial recommendation price.


Following the announced transaction HEO trades with a trailing EV/EBITDA multiple of 20.0 times, a trailing Price/CFO of 13.0 times, and a trailing P/Adj. Earnings of 48.1 times

Our Take:

Overall, and in consideration of current multiples in the general and small-cap markets the offer appears relatively fair from a valuation perspective. We have just released our full update on H2O to clients with our full recommendation on what should be done with their share holdings in the near and mid-term taking into consideration the 30- day go-shop period which is part of the deal. Ultimately, we see this deal or a potential subsequent higher offer as an excellent exit point from what has been a great investment in H20 over the past 4 years with a return 266% – illustrating the types of strong returns that can be made investing in high quality growth oriented Canadian Small-Cap stocks.

Our clients also received a list of 5 strong, growth oriented small caps to redeploy their gains in over the next 1-3 months.



Velan symbol VLN on the TSX is a world-leading producer of highly engineered industrial valves. The company serves various industries including power generation, oil and gas, refining and petrochemicals, chemicals, LNG and cryogenics, pulp and paper, geothermal processes and shipbuilding.


The stock is currently trading at roughly $5.60 a share with a $120 million market cap being down 5% year to date.

However, the stock has a much more eventful year than a 5% change would imply. In February 2023, the shares skyrocketed to just under $13 following the announcement that Flowserve symbol FLS on the NYSE was to acquire Velan at $13 a share representing a 100% premium to the prior days trading and an even higher premium compared to the prior weighted 30 days of the announcement.


The acquisition was expected to be accretive within the year as Flowserve expected US$20 million in cost synergies within the first two years with the expectation of accretive adjusted EPS within the first year. Flowserve expected to leverage its network of customers with Velan’s product stack, which is the reason they expected significant synergies which in turn resulted in the high acquisition premium. With the expectation that the deal would close within calendar Q2 2023.

4)( Same as Slide 2)

However, the acquisition was not to be.  In August the companies announced an extended timeline for the acquisition, causing the shares to drop to the $10 range, as regulatory approvals have not been obtained. Then the deathblow of the deal occurred in early October with French Regulators denying regulatory approval and will not approve it regardless of any remedies Flowserve could provide. The core reason is French Regulators did not want a sale of a supplier for nuclear reactor parts coming under the control of a US company but did note that other factors were a consideration besides nationality. Causing the shares to fall to the current range of $5.60


So, without the deal does Velan have any value as an investment?

During fiscal Q2 2024, the company had sales of $80.3 18.7% higher than Q1, but 5.6% lower than Q2 2023. Looking at a longer period of time, sales have been relatively flat with variance since fiscal 2007.

GAAP was a loss of $0.10 compared to a loss of $0.17 in the prior year. Similarly to revenue, we’ve seen no progress on EPS over the past 16 years, in fact, it has deteriorated if anything.


The balance sheet is relatively strong, but has been deteriorating as well, the company has a net debt and leases position of $7.1 million with significant additional liquidity available through credit facilities. The company does have lumpy cash flows due to the timing of payments much of which is prepaid by customers which is a positive when it comes to cash management. But like the revenue and EPS cash flows and EBITDA as a proxy have have no sustained growth just variance quarter to quarter and year to year.  As well, another major factor posing a risk to the balance sheet is the company has added an additional US $56 million legal provision for lawsuit settlements related to its previous use of asbestos in its products. The significant increase is because the company is now accounting for unfiled lawsuits based on their expectation of additional lawsuits and settlements in the future.


Quickly looking at valuations, as the company does not have positive earnings we are going to look at adjusted EV/EBITDA which removes the impact of the legal provision which comes out to 4.4 times. However, if we treat the total $73.3 million of asbestos provisions like debt or a reduction of cash adjusted EV/EBITDA is 7.7 times, that said there is no guarantee that the provisions will be realized as they are actuarial expectations based on expected settlements, which has significant assumptions embedded and if we realized we do not have a timeline. Looking at this adjustment is just useful to see the potential impact of the provision on the valuation.


Our Take,
After the acquisition of Velan was blocked, the company is not appealing due to the lack of sustained growth across any metric, a balance sheet that may become significantly weaker due to expected future settlements which could potentially increase leverage significantly. Also, a lesson you can take away from Velan is holding your shares during a potential acquisition for that extra few percent return does carry risk, and in Velan’s case materialized to the downside.


YSOT RE Royalties (RE:TSX-V) 

We have highlighted RE as a monitor for clients in the past and have spoken with management about a year ago while the stock was trading in the $1.05 range. But following our recent interview with RE’s CEO in LA last week I thought I would briefly discuss the stock on the podcast.


Slide 1



Price: $0.64

Market Cap: $26.7 million

Yield: 6.70%


RE Royalties Ltd. acquires revenue‐based royalties from renewable energy generation facilities by providing a non‐dilutive royalty financing solution to privately held and publicly traded renewable energy generation and development companies.

Slide 2

Their royalty portfolio currently has over 120 royalties with primary exposure to US & Canada, but also Mexico and Chile.

Slide 3

Oct 4, 2023 – Entered into royalty-based financing agreement with Revolve Acquisition. (Wind/Solar/Battery). Providing CAD$4.0M @ 12% Interest.

Aug 8, 2023 – Entered into royalty-based financing agreement with Butler Corporation. (Solar Battery). Prioviding USD$3.2M @ 12% Interest and 10-year royalty of 5% Gross Revenues.

May 25, 2023 – Entered into royalty agreement on 100MW of output from Wind Project located in Alberta, receiving monthly royalty for a 12-year period (aprox. $132K per annum Royalty Income).

April 3, 2023 – Closed its Series 3 Green Bond for gross proceed of CAD$16.42M & USD$1.24M @ Rate 9% (Typical 14%).

June 15, 2022 – Last time the company Diluted Shareholders – Raise due to a large fund wanting to take position. 

Notes: On track to do about 6 transactions this year. With $16M cash to deploy looking to add $10M in revenue. Do not want to raise equity at these levels but continue to be attracted to Green Bonds. Insider ownership 25%.

Slide 4

Financially the business has performed well and why we originally pulled out the stock in our SEDAR Sweeps. As revenue is up 290% Y/Y (primarily due to a “Gain on Royalty Buyback” of $1.5M.. but if we exclude this, revenue was still up over 100%). Looking at EPS it also increased by 100% to $0.02 per share, but again, this was influenced by the large increase from royalty buyback. And historically we have seen the company jump in and out of accounting earnings.

The balance sheet appears reasonable with Net Debt to Adj. EBITDA of ~4x.

Now overall, I would say that the financials have been trending in the right direction, but we will be booking another call with Bernard the CEO to get more clarity on:

  1. What percent of the finance income is actually classified as royalties (compared to just normal loans).
  2. How many of the royalties in the portfolio have a buyback provision – as we have said on the podcast before, a tricky thing with some of these royalty companies is that the high quality royalties end up getting bought out while the more “risky” less quality ones remain on the balance sheet.


So at this time we continue to monitor the stock and I will be booking that call with Bernard to see if he can give us more clarity on the financials.


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