Look for second half strength from Tantalus, says Beacon

Beacon Securities analyst Gabriel Leung remains taken by Tantalus Systems (Tantalus Systems Stock Quote, Chart, News, Analysts, Financials TSX:GRID), reiterating his “Buy” rating and target price of C$4.00/share in an update to his clients on Tuesday.

Founded in 1989, Vancouver-based Tantalus develops and delivers mission-critical, smart grid solutions for public power and electric cooperative utilities to automate their distribution grids. The company has grown to include roughly 120 employees and over 195 utilities for customers, representing about four million addressable end points.

Leung’s latest update, just a week after initiating coverage on the company, comes after Tantalus reported its second quarter financial results, which were in line with Beacon Securities’ expectations.

Tantalus reported $8 million in revenue for the quarter compared to $7.8 million in the second quarter of 2020 (a 2.6 per cent year-over-year increase), with $5.3 million of the revenue coming from connected devices (up from $4.9 million) and $2.8 million in revenue coming from Utility Software Applications and Services, compared to $2.9 million at the same point in 2020. (All figures in US dollars except where noted otherwise.)

The company also reported a gross margin of 47.3 per cent for the quarter, down from 49.4 per cent on a year-to-year basis, with connected devices clocking in at 31.9 per cent (down from 35 per cent) and Utility Software Applications and Services at 76.8 per cent, up from 73.9 per cent. Meanwhile, the company’s adjusted EBITDA came in at $65,000 compared to $738,000 in the same quarter last year.

“We are pleased with the positive momentum that continues to build in our sector given the impact extreme weather, calls for decarbonization and changing consumer expectations are having on the utility industry. With the closing of our recent financing announced on August 12th of this year, our balance sheet has never been stronger and will enable us to actively pursue our multi-pronged growth strategy to support public power and electric cooperative utilities,” said Peter Londa, President and CEO of Tantalus in the company’s August 16 press release.

“While COVID-19 and the global supply constraints of semiconductors and electronic components are impacting our entire industry, we remain confident that Tantalus is well positioned to continue to expand our user community through customer acquisition and deliver next-generation smart grid solutions with predictive analytics to help build sustainable utilities,” Londa wrote.

Leung attributes the 91.2 per cent year-over-year decrease in the adjusted EBITDA to additional costs incurred from becoming a public company earlier this year, a reduction in government assistance from the Scientific Research and Experimental Development (SR&ED program), foreign exchange and an overall increase in headcount.

Cash operating expenses were $3.7 million, with Leung projecting increases over the next few quarters, while free cash flow came in at negative $1.3 million and operating cash flow resting at negative $1.2 million.

Leung estimates the company’s pro forma cash to be at approximately $16.3 million, aided by an additional block of financing of C$10.6 million by issuing 4,710,110 common shares at C$2.25 per share in an overnight marketed public offering that closed on August 12.

The analyst has forecasted minimal growth from a revenue perspective for Tantalus in 2021, with his $34.2 million projection representing a 3.6 per cent year-over-year increase from the $33 million reported in 2020. However, Leung projects a jump to $40.7 million in revenue for 2022, which would be a 19 per cent year-over-year increase.

With the additional costs of going public in mind, Leung’s adjusted EBITDA projection drops from the reported $2.6 million from 2020 to $700,000 for 2021 for a 73.1 per cent year-over-year decrease before rebounding to a projected $1.1 million in 2022, a 57.1 per cent year-over-year increase.

From a valuation perspective, Leung foresees the company’s EV/Sales multiple dropping from the reported 2.1x in 2020 to a projected 2x in 2021, then again to 1.7x in 2022. Meanwhile, another side effect of going public is a more volatile EV/adjusted EBITDA projection, with Leung forecasting a jump from the reported 26.4x in 2020 to 104.3x in 2021 before settling back down to a projected 64x for 2022.

On a comparative basis, Leung’s 2022 EV/Sales multiple of 1.7x for Tantalus compared to a 4.7x average multiple among IoT companies and a 4.4x average multiple among Smart Grid companies f0r a global average of 4.5x.

As the company looks forward to potential growth opportunities, Leung believes Tantalus is in a solid position overall.

“Looking into H2 2021, aside from season strength (which could be negatively impacted by COVID-related headwinds), we believe Tantalus could benefit from several customer field trials for its grid optimization software converting to full scale deployments,” he said. “Beyond 2021, we believe the company could also benefit from the new products such as its next-generation fiber-connected metering solution.”

At press time, Leung’s C$4.00 target price represented a projected one-year return of 90 per cent. Since going public on February 9, GRID’s stock price has dropped from a high point of C$3.45 to now about $2.15 per share.

Disclosure: Tantalus Systems is an annual sponsor of Cantech Letter.