Tantalus Systems is attractive at these levels, says Paradigm

Look for a strong outing over the rest of 2022 from Canadian cleantech name Tantalus Systems (Tantalus Systems Stock Quote, Charts, News, Analysts, Financials TSX:GRID). That’s the scoop from Paradigm Capital analyst Daniel Rosenberg who reviewed Tantalus’ latest quarterly results in an update to clients on Thursday, saying the stock is a Buy at these levels.

Tantalus, a Burnaby, BC-based smart grid technology company, announced its fourth quarter 2021 financials on Wednesday, featuring revenue of $7.6 million and an adjusted EBITDA loss of $1.3 million. Gross margins dropped to 44.1 per cent from 51.6 per cent due in part to a higher proportion of hardware sales and higher costs resulting from supply chain constraints. (All figures in US dollars except where noted otherwise.)

Operationally the company grew its customer base over the fourth quarter to over 210 utilities, adding seven new ones over the Q4 and adding 25 over the year. Tantalus also introduced its first AI-enabled data analytics solution in Tantalus Grid Reliability Analytics, used to detect anomalies in power quality and offered as a SaaS solution. As well, the company started development on the TRUSense Fiber Gateway next-gen Fiber-to-the-Home solution to help utilities better serve their customers. Post-Q4, Tantalus made the acquisition of Congruitive, a smart grid integration platform, for $8 million. 

On guidance, Tantalus management reaffirmed its expected 2022 revenue of between $38.6 and $40.2 million, which would represent growth of between 20 and 25 per cent. 

“2021 was a historic year for Tantalus as we successfully migrated to the public markets, secured over $20 million through two financings and continued to witness strong growth in our user community of utilities throughout the year,” said Peter Londa, President and CEO of Tantalus, in a press release.

“During 2021, we delivered year-over-year growth of 27.5 per cent in orders from our sales pipeline, expanded our user community to over 210 utilities by adding 25 new customers and launched our first AI-enabled data analytics tool to help utilities improve their resiliency. Looking forward to 2022, we anticipate strong revenue growth with approximately $27 million in backlog that is expected to be shipped during the year. We are also witnessing strong secular drivers that are motivating utilities to modernize their distribution grids,” Londa wrote.

Looking at the Q4 numbers, Rosenberg said they came in-line with previously released guidance while noting the record revenue backlog for the quarter of $27 million. Rosenberg said the backlog, the strongest in company history, should be realized over 2022 and that it should drive revenue over the first quarter.

“Management’s outlook for 2022 is positive, though conservative, in our view, given the recent acquisition and record backlog. KPIs are tracking well with Tantalus surpassing 2.8 million endpoint deployments and adding 25 new utilities over 2021, taking the total count to ~250 (including Congruitive),” Rosenberg wrote.

“We have seen strong adoption of Tantalus’ suite of products that has led to consistent growth and impressive customer retention numbers,” he said. “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 given its differentiated technology.”

“The company offers utilities very attractive economics and technological flexibility by combining existing legacy infrastructure with modern technology at a fraction of full rip-and-replace costs. The recently announced Congruitive acquisition provides meaningful cross-selling synergies and complementary technology. We see Tantalus as very well positioned having assembled leading technology to address the needs of next-generation grid infrastructure,” Rosenberg wrote.

On the 2022 year, Rosenberg has upped his forecast, now calling for revenue of $39.6 million (previously $32.2 million) and gross profit of $18.1 million (previously $14.4 million). His adjusted EBITDA call has been raised from negative $0.8 million to negative $0.2 million. For 2023, the analyst is forecasting revenue of $44.5 million, gross profit of $20.8 million and adjusted EBITDA of positive $0.9 million. 

Rosenberg said with $11.6 million in cash versus $11.4 million in debt, Tantalus has a sufficient cushion to fund its near-term growth initiatives and that management is actively evaluating organic and inorganic opportunities for growth.

Finally, on comps, Rosenberg sees GRID to be currently trading at 1.2x his 2023 EV/Revenue multiple versus its IoT peers at an average of 2.5x and Smart Grid companies at 3.9x. 

“We believe Tantalus’ offering provides significant value to customers seeking to maintain flexibility and future-proof against changing technologies. GRID is re-investing cash flow in a market with several secular tailwinds, including increasing adoption of EVs, renewable energy sources and major infrastructure funding by the government, which will result in a high return on investment,” Rosenberg wrote.

“M&A and international expansion can also serve as future growth drivers. Valuation is attractive and we think GRID is very well positioned with differentiated technology. While there may be short-term supply chain issues, our long-term thesis remains intact. We reiterate our Buy recommendation,” he said.

Along with the Buy call, Rosenberg reiterated his C$3.25 target price, which at press time represented a projected one-year return of 141 per cent.