Tantalus Systems has a 34 per cent upside, says PI Financial

Smart grid technology company Tantalus Systems (Tantalus Systems Stock Quote, Charts, News, Analysts, Financials TSX:GRID) received a coverage launch from PI Financial on Thursday, with analyst Kris Thompson calling the company a high-voltage future opportunity. 

Tantalus develops and delivers technology solutions for power utilities to digitally transform and automate their distribution grids. Founded in 1989, Tantalus went public earlier this year through an RTO at C$2.25 per share, raising almost C$10 million in financing. The stock initially moved up before pulling downward and is currently trading at around C$2.00. Tantalus moved from the TSX Venture to the senior board on May 10.

Burnaby, BC-based Tantalus, which has offices in Norwalk, Connecticut, Kanata, Ontario and Raleigh, NC, has proprietary edge-computing modules for installation in third-party metered endpoints to allow utilities to manage their distribution networks. The company currently has 199 public power and electric cooperative utility customers across North America and the Caribbean with 2.68 million edge-computing modules installed. The company has historically generated revenue through perpetual sales with 22 per cent annual maintenance and annual technical support agreements but is currently developing a hardware-enabled SaaS business model.

Thompson said there are macro trends in Tantalus’ favour. 

“Utility infrastructure assets are aging and require new technology to help address shifting customer habits such as distributed energy resources (solar panels and electric vehicles being plugged into the electric grid) and extreme weather conditions caused by global warming that more frequently interrupt the distribution network,” Thompson wrote.

Thompson said Tantalus’ total addressable market in the US is $4.7 billion, made up of $3.7 billion in Connected Devices and US$1 billion in Utility Applications and Services. The US TAM is at about 2,900 utilities serving about 42 million end users, and thus, with Tantalus’ current 199 customers, the installed base shows from where GRID’s organic growth can come.

Thompson also likes Tantalus’ long history of profitability with a strong reputation in the sector and 18 straight quarters of positive EBITDA, even through the more challenging times of COVID-19.

“What we really like about the Company is a strong management team with big aspirations, supported by a thirty-year operating history, a large and loyal customer base, a three-year history of cash positive operations, and a healthy balance sheet that will enable some risk taking,” Thompson said.

“But over the near-term we expect a supply-constrained revenue environment and escalating operating expense associated with pubco infrastructure and new sales & marketing efforts will lead to depressed EBITDA margins. We’d prefer to wait for some confirmation of revenue acceleration before recommending a position in the stock. There is also a 12-month lock-up expiration approaching in late January 2022, which may cause downward pressure on the stock should it rally between now and then,” Thompson said.

Tantalus last reported earnings in mid-August where the company’s second quarter 2021 featured revenue of $8.0 million compared to $7.8 million a year earlier and adjusted EBITDA of $65,475 compared to $737,665 a year earlier. 

The company added six new utilities to its customer base over the Q2, making 11 new customers for the year so far. Tantalus also completed a C$10.6 million overnight-marketed financing and finished the quarter with $10.7 million in cash compared to $4.6 million at the end of 2020.

“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,” said Peter Londa, President and CEO, in a press release.

“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,” he said.

“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 said.

By the numbers, Thompson is calling for Tantalus to generate 2021 and 2022 revenue of $34 million and $39 million, respectively, and 2021 and 2022 EBITDA of $0 and $1 million, respectively. The analyst said GRID’s near-term revenue momentum remains constrained due to the supply issues and component shortages, with pressure on the company’s bottom line, as well, such that its 18-quarter streak “may come to an end,” he said.

On comps, Thompson wrote, “The comparables trade in a wide range but generally support a 2-3x EV/Sales multiple. GRID trades at a very close EV/Sales multiple versus its main meter integration partner, Itron. Itron and GRID are trading at a lower percentage of their 52-week highs compared to most other utilities related vendors. If Tantalus can continue to transition its revenue model to higher-margin SaaS revenue, our DCF valuation would climb along with the trading multiples.”

Thompson has started Tantalus off with a “Neutral” rating and C$2.65 target price, which at the time of publication represented a projected one-year return of 33.8 per cent.

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