Tantalus Systems is a Buy, says Beacon Securities

A new acquisition looks good on Tantalus Systems (Tantalus Systems Stock Quote, Charts, News, Analysts, Financials TSX:GRID), according to Beacon Securities analyst Gabriel Leung. In a Tuesday report to clients, Leung maintained his “Buy” rating on the stock, saying the strategic acquisition expands the addressable market for smart grid solutions company Tantalus.

Burnaby, BC-based Tantalus develops and delivers mission-critical smart grid solutions for public power and electric cooperative utilities to automate and make their distribution grids more reliable, stable and efficient. 

The company announced on Tuesday the acquisition of DLC Systems Inc d/b/a Congruitive an enterprise solutions business with the Congruence.IQ (C.IQ) software platform that enables the interoperability of devices across power grids. The deal includes $8 million up front ($3.5 million in cash, 869,565 shares at $1.38 and assuming debt on Congruitive’s balance sheet) and up to $5 million in a two-year earn-out. (All figures in US dollars except where noted otherwise.)

Conguitive sells its software to investor-owned utilities, smart meter vendors and renewable power integrators and had calendar 2021 revenues for software and services of $2.5 million.

“C.IQ is a brilliant addition to Tantalus’ existing portfolio of solutions and is core to our mission to help utilities become truly sustainable financially, operationally and environmentally. It accelerates our ability to help public power and electric cooperative utilities prepare for the impact that EVs and roof-top solar panels will have on the reliability of their distribution grids,” said Tantalus CEO Pete Londa in a February 1 press release.

Tantalus said the rise in electric vehicles on the highways and the further development of solar power are instances of what it calls a major inflection point for utilities with “the electrification of everything,” with Tantalus saying the acquisition of Congruitive is central to its strategy.

“Utilities are expected to support the meteoric rise in EVs and DERs despite the massive challenges these new technologies pose to their operational and financial performance. Utilities are also expected to reliably deliver additional power to support EVs even as they’re asked call to decarbonize their business. This is why Tantalus remains strategically dedicated to ensuring utilities are prepared to face these challenges while continuing to serve their communities,” Londa said. 

Looking at the deal, Leung said considering the ticket price and debt (which he estimates at about $3.3 million), the takeout valuation is at 3.2x EV/Sales for calendar 2021. With the acquisition, Leung estimated Tantalus at cash of about $11.1 million and debt of about $11.4 million.

“In our opinion, this is a very strategic acquisition for Tantalus as it complements its TUNet platform very well and catapults the company into the forefront of assisting utilities prepare for the integration of EVs and DERs such as solar and storage projects, thereby increasing its total addressable market opportunity,” Leung wrote.

Leung has made adjustments to his estimates and is calling for full fiscal 2021 revenue and EBITDA for Tantalus of $33.6 million and negative $0.8 million, respectively, (compared to 2020’s $33.0 million and $2.6 million, respectively) and fiscal 2022 revenue and EBITDA of $40.8 million and negative $0.2 million, respectively.

On valuation, Leung sees GRID’s EV/Revenue going from 2.0x in 2020 to 2.0x in 2021 to 1.6x in 2022.

“We reiterate our Buy rating and C$4.00 target price, which is based on 3.5x CY22e EV/Sales. The stock currently trades at 1.6x versus comparables at 3.7x,” he said.

At press time, Leung’s C$4.00 target represented a projected one-year return of 122 per cent.

Tantalus Systems began trading on the TSX Venture a year ago and so far has seen its share price drop, currently down 49 per cent over that time span. Year-to-date, the stock is down about five per cent.

The company last reported earnings in mid-November where its Q3 2021 featured revenue of $8.5 million compared to $8.8 million for the prior year period and adjusted EBITDA of negative $580,535 versus positive $951,927 a year earlier. The company said the drop in earnings was primarily due to incremental public company expenses and the reduction in SR&ED (Scientific Research and Experimental Development) funding in 2021.

In other recent news, Tantalus announced in December a partnership with Irby Utilities, a subsidiary of Sonepar USA that offers fibre network solutions. The partnership will see Irby and Tantalus team up to offer utilities Tantalus’ TRUSense Fiber Gateway.

“In partnering with Tantalus, Irby Utilities is able to provide a differentiated solution to our utility customers,” said Geff Smith, VP Technology and Communications at Irby Utilities, in a press release.

“Working together, we will deliver a solution that unlocks significant benefits from utilities’ investments in fibre. Utilities will be able to achieve situational awareness today by accessing data from the edge of the grid—regardless of what AMI system they have deployed—while preparing for the operational and environmental challenges of tomorrow,” Smith said.

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