Paradigm initiates coverage of Tantalus Systems with a Buy rating

Paradigm Capital analyst Daniel Rosenberg is tantalized by the potential of Tantalus Systems (Tantalus Systems Stock Quote, Chart, News, Analysts, Financials TSX:GRID), initiating coverage on October 1 with a “Buy” rating and target price of C$3.00/share.

Burnaby, BC-based Tantalus provides smart grid solutions to public power and co-operative utilities that deliver electricity, water and gas. The company’s TUNet technology platform collects data from meters and devices to generate insights to help predict potential issues, enable efficient transmission and better manage the load.

Tantalus recently hit a significant milestone, having reached 200 utilities using its services in September.

“We have seen strong adoption of Tantalus’ suite of products that has led to consistent growth and impressive customer retention numbers,” Rosenberg said in his report. “Governments are deploying major capital into infrastructure following years of underinvestment. We view Tantalus as particularly well positioned to benefit from a major capex cycle.” 

Rosenberg said the company has experienced positive organic growth to the tune of a CAGR of 8.4 per cent since 2013 on account of onboarding new clients and expanding relationships with existing clients, some of which have lasted for decades to help Tantalus reach a retention rate of 98.9 per cent.

The Tantalus platform allows the company to install and upgrade hardware for grids over a ten to 15-year period, which provides the company with opportunities to upsell professional services and analytics for its high-margin software, which has contributed to Tantalus reaching a 45 per cent gross margin and 18 consecutive quarters of positive EBITDA reports.

Most recently, Tantalus completed the rollout of a new TUNet smart grid system for Minnesota-based utility Crow Wing Power, replacing more than 60,000 aging meters connected through a one-way power line carrier (PLC) communications system.

“In seeking to deliver purpose-built solutions that meet the immediate and long-term needs of public power and electric cooperative utilities, we take great pride in having the opportunity to work alongside the team at Crow Wing Power to help their utility become more sustainable,” said Peter Londa, Tantalus’ CEO in the company’s September 29 press release. “By collaborating with our user community to digitize the distribution grid, we can empower utilities, such as CWP, to have more granular control and situational awareness of their networks to improve their efficiency and reliability.”

Inclement weather, in particular storms that did damage in New Orleans and Texas, have put utilities under the microscope, with Rosenberg highlighting an opportunity for Tantalus with more than half of the approximately 2,900 American utility providers and 42 million end users. He also notes that American lawmakers are getting involved as well, as political bipartisan support has gathered to advance a $1.2-trillion infrastructure bill aimed at modernizing old infrastructure.

Even though Tantalus primarily targets public power and cooperative utilities with fewer meters, Rosenberg still believes the company has a potential $4.7 billion opportunity.

Rosenberg projects modest growth for Tantalus over the next two years, with his revenue estimate of $34.8 million (all report figures in US dollars except where noted otherwise) in 2021 representing a potential 5.5 per cent year-over-year increase over the $33 million reported in 2020, though it also registers below the consensus projection of $35.1 million. For 2022, Rosenberg projects a jump to $38 million for a potential 9.2 per cent year-over-year increase, with the consensus projection set at $40.5 million.

Gross profit projections also grow slightly in Rosenberg’s projections, though the $16.2 million projected for 2021 is slightly below the consensus estimate of $16.3 million, and would lead to a margin of 46.5 per cent, a tick down from the 48.8 per cent reported in 2020. Rosenberg projects a slight rebound in 2022 to $17.8 million for a 46.8 per cent margin, though the number is short of the consensus projection of $19.4 million.

Meanwhile, Rosenberg also expects changes in the company’s adjusted EBITDA, falling from a margin of eight per cent ($2.6 million) in 2020 to a projected 1.2 per cent ($400,000 total EBITDA) in 2021 against the consensus estimate of $500,000, with a slight uptick to 2.7 per cent ($1 million total EBITDA) in play for 2022 compared to the consensus expectation of $1.4 million in EBITDA.

Overall, Rosenberg believes Tantalus is in an advantageous position when looking ahead to future infrastructure.

“We believe Tantalus’ offering provides significant value to customers seeking to maintain flexibility and future-proof against changing technologies,” Rosenberg said. “Tantalus has a large market to pursue within North America and M&A and international expansion can serve as future growth drivers.”

At press time, Rosenberg’s C$3.00 target represented a projected one-year return of 38 per cent. Since going public on February 9, the Tantalus stock price has dropped from its high point of C$3.45/share, producing a 38 per cent loss for the year to date.