WaterFurnace Renewable Energy, Inc.

WFI : TSX : C$24.37
Target: C$29.00

A Canadian corporation headquartered in Fort Wayne, Indiana, WaterFurnace Renewable Energy is a leading North American manufacturer of geothermal and water-source heat pumps for the residential, commercial and institutional HVAC markets. Sold under the WaterFurnace brand name, WFI’s products are sold, installed and serviced by a growing network of independent dealers and contractors in the US and Canada and in select international markets.
All amounts in C$ unless otherwise noted.

Sustainability — Energy & Power Technologies
Investment recommendation
We are reiterating our BUY rating and increasing our one-year target price to C$29.00 from C$25.00 as we roll forward our base valuation year from 2013 to 2014. Over the last few years, in our view, WaterFurnace has executed beautifully against the backdrop of a weak U.S. economy and housing market, as well as tight credit and low natural gas prices, while remaining focused on building a much broader platform (products / channels / geographic reach) to drive above-average growth over the medium to long term. With a dividend yield of 3.9%, limited liquidity, a strong track record and balance sheet, and an excellent long-term growth opportunity – with strong positive operating leverage already evident on very modest revenue growth – we continue to advise buying the shares ahead of a more meaningful top-line recovery.
Our C$29.00 target price is supported by our DCF model (12.5% discount rate, 4% terminal growth rate) to which we add a modest value for WaterFurnace’s share of the China JV (15 times forward earnings). This JV has the potential to add substantial incremental shareholder value over the next several years, in our view. This translates into P/E multiples of 23 times and 18 times our 2014 and 2015 estimates.

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