Smart grid solutions company Tantalus Systems (Tantalus Systems Stock Quote, Chart, News, Analysts, Financials TSX:GRID) received a coverage launch on Friday from Beacon Securities, where analyst Gabriel Leung started the company off with a “Buy” rating and C$4.00 target, which at press time represented a projected one-year return of 90 per share.
Vancouver-based Tantalus develops and delivers mission-critical, smart grid solutions for public power and electric cooperative utilities to automate their distribution grids. Founded in 1989, the company went public via an RTO with RiseTech earlier this year, raising about C$10 million at C$2.25 per share.
With about 120 employees, Tantalus currently has over 195 utilities for customers, representing about four million addressable end points of which about 2.7 million have been deployed as of the end of the first quarter 2021. The company is currently deploying smart grid solutions across the utility market across North America and the Caribbean Basin, focusing on electric and multi-commodity utilities such as electricity and/or water and gas.
Leung sees strong tailwinds ahead for Tantalus that will help drive the demand for the company’s smart grid solutions.
On the one hand, Leung pointed to the widespread need to transform legacy power grids from single, centralized sources of generation and delivery to more multi-directional, integrated smart grids capable of handling two-way power flows, as homes and buildings become more incentivized to adopt distributed energy resources (DERs) like solar, electric vehicles, distributed storage and microgrids. Moreover, the decarbonization of power grids across the United States will require significant upgrades to distribution grids.
At the same time, Leung said utilities need to respond proactively to power outages caused by storms and other major events and they also need to adapt to changing consumer demands for better service including real-time data on consumption.
All of that is where Tantalus’ smart grid systems come in, with their digitally-based sensing, information management, communications, computing and control technologies and field devices, all of which work to coordinate multiple electric grid processes.
“We believe investors should win with Tantalus given its multi-year organic growth opportunity, combined with its attractiveness as a takeover candidate given its compelling product platform and growing customer base,” Leung said.
Tantalus’ solutions portfolio includes software applications for tasks such as next-gen advanced metering, load management and grid optimization, enterprise software for user interface, APIs and standards and device management and data warehouse, connected device solutions and communications network solutions.
Leung highlighted a number of key components of Tantalus’ Connected Devices segment, including its Tantalus Utility Network (TUNet) Infrastructure devices and its TRUEdge Communication Modules. Leung said once Tantalus’ connected devices and infrastructure are deployed across a utility’s grid, the utility can then use Tantalus’ suite of proprietary software and applications.
Leung said once Tantalus signs a customer, it’s a multi-year revenue opportunity, while as far as market size goes, the analyst quoted about 2,900 utilities in the US alone covering 42 million addressable end points, with Tantalus currently servicing 195 of these utilities.
“Tantalus’ technology stack is very sticky, particularly once the communication network has been deployed (followed by connected devices), which has led to high (i.e. 99 per cent) retention rates, which we view as a positive data point,” he said.
By the numbers, Tantalus hit $33.0 million and $2.6 million in 2020 revenue and EBITDA, respectively, while Leung is calling for 2021 revenue and EBITDA of $34.2 million and $0.7 million, respectively, and 2022 revenue and EBITDA of $40.7 million and $1.1 million, respectively. (All figures in US dollars except where noted otherwise.)
“In terms of our growth forecasts, we are modeling 3.5 per cent year-over-year growth in CY21e and 19 per cent for CY22e. We are opting to model conservative CY21e growth assumptions due to ongoing concerns around COVID and supply chain constraints. We will revisit our growth assumptions once additional data points materialize over the near-term. Generally speaking, growth should be driven by new utility wins, along with ~1.5 million end points from existing utility clients, which have yet to be deployed,” Leung wrote.
“We expect the company to remain (modestly) EBITDA positive for our forecast period with excess cash flow being reinvested for growth. We would note that the company does report in US dollars, but has an operating expense base in Canada (~50 per cent of operating expenses), which are being negative impacted by the y/y decline in the US versus Canadian dollar. Relative to previous years, the company also has additional costs of being a public company, along with a reduction in SR&ED credits,” he said.
In terms of comparables, Leung estimates Tantalus to be currently trading at about 1.7x 2022 EV/Sales versus IoT and Smart Grid companies at an average of about 4.5x.
With a market cap of about $82 million, Tantalus is down about 38 per cent since its debut on the TSX Venture on February 9. The company graduated to the TSX senior board on May 10.
Disclosure: Tantalus Systems is an annual sponsor of Cantech Letter.