What is HEO.TO's Intrinsic value?

H2O Innovation Inc (HEO.TO) Intrinsic Value Analysis

Executive Summary

As of May 29, 2025, H2O Innovation Inc's estimated intrinsic value ranges from $1.45 to $1.98 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $1.77 -58.4%
Discounted Cash Flow (5Y) $1.45 -65.8%
Dividend Discount Model (Multi-Stage) $1.98 -53.5%
Earnings Power Value $1.48 -65.1%

Is H2O Innovation Inc (HEO.TO) undervalued or overvalued?

With the current market price at $4.25, the stock appears to be significantly overvalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate H2O Innovation Inc's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.2% 3.7%
Equity market risk premium 5.1% 6.1%
Adjusted beta 0.71 0.92
Cost of equity 6.8% 9.8%
Cost of debt 7.3% 14.9%
Tax rate 25.9% 26.5%
Debt/Equity ratio 0.18 0.18
After-tax WACC 6.6% 10.0%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 8.3% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $253 (FY06-2023) to $420 (FY06-2033)
  • Net profit margin expansion from -1% to 5%
  • Capital expenditures maintained at approximately 3% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $1 $197M 87.5%
10-Year Growth $2 $225M 69.8%
5-Year EBITDA $2 $228M 89.2%
10-Year EBITDA $2 $269M 74.7%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 0.0%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 8.3%
  • Long-term growth rate: 3.5%
  • Fair value: $1.98 (-53.5% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 9.8% (Low) to 6.8% (High)
  • Long-term growth rate: 2.5% (Low) to 4.5% (High)
  • Fair value range: $(0) to $(1)
  • Selected fair value: $-0.47 (-111.2% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $16M
Discount Rate (WACC) 10.0% - 6.6%
Enterprise Value $158M - $240M
Net Debt $66M
Equity Value $92M - $174M
Outstanding Shares 90M
Fair Value $1 - $2
Selected Fair Value $1.48

Key Financial Metrics

Metric Value
Market Capitalization $383M
Enterprise Value $448M
Trailing P/E 0.00
Forward P/E 149.64
Trailing EV/EBITDA 11.00
Current Dividend Yield 0.00%
Dividend Growth Rate (5Y) 0.00%
Debt-to-Equity Ratio 0.18

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 35% $0.53
Discounted Cash Flow (5Y) 29% $0.36
Dividend Discount Model (Multi-Stage) 24% $0.40
Earnings Power Value 12% $0.15
Weighted Average 100% $1.69

Investment Conclusion

Based on our comprehensive valuation analysis, H2O Innovation Inc's weighted average intrinsic value is $1.69, which is approximately 60.2% below the current market price of $4.25.

Key investment considerations:

  • Strong projected earnings growth (-1% to 5% margin)
  • Consistent cash flow generation
  • Conservative capital structure (Debt/Equity of 0.18)

Given these factors, we believe H2O Innovation Inc is currently significantly overvalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.