Beacon Securities analyst Gabriel Leung is still charged up about Tantalus Systems (Tantalus Systems Stock Quote, Chart, News, Analysts, Financials TSX:GRID), reiterating his “Buy” rating and target price of C$4.00/share for a projected return of 93 per cent in an update to his clients on Tuesday.
Founded in 1989, Vancouver-based Tantalus develops and delivers mission-critical smart grid solutions for public power and electric cooperative utilities. The company helps utilities automate their distribution grids, with Tantalus is currently delivering its solutions to over 200 utilities, representing about four million addressable end points.
Leung’s latest update comes after Tantalus released its third quarter financial results, which were headlined by revenue of $8.5 million in the quarter (all report figures in US dollars unless otherwise noted), which came in slightly below the Beacon Securities projection of $8.7 million in revenue, as well as being a step below the $8.8 million in revenue the company reported in the same quarter of 2020.
Looking closer at the Tantalus revenue mix, Connected Devices accounted for $6.1 million in the quarter (down from $6.3 million year-over-year), with Utility Software Applications and Services making up the remaining $2.3 million (down from $2.5 million year-over-year). Leung attributed the shortfalls to continued challenges within the supply chain, particularly in the Connected Devices sector, as well as project delays related to the ongoing COVID-19 pandemic.
Leung noted that the supply chain challenges also wreaked havoc on the company’s overall gross margin, which came in at 42.2 per cent compared to 46.9 per cent year-over-year; Connected Devices took a heavier hit at a 31.7 per cent margin compared to 37.9 per cent year-over-year, while Utility Software Applications and Services was a less significant drop at 69.7 per cent compared to 70 per cent year-over-year.
Despite the slight revenue miss, the company on-boarded seven new utilities in the quarter to bring its total number of clients over 200.
“We are extremely pleased with our team’s performance during the quarter despite witnessing the continuing impact of COVID-19 and global supply chain constraints for semiconductors and other electronic components. The global supply chain challenges directly correlated to backlog revenue being pushed out of Q3 and into future periods,” said Peter Londa, President and CEO of Tantalus in the company’s November 15 press release.
The company reported a rare negative EBITDA of $581,000, which Leung attributed to additional costs incurred from becoming a public company earlier this year, a reduction in government assistance from the Scientific Research & Experimental Development (SR&ED) program as it is no longer private, foreign exchange, and an overall increase in the company’s headcount as it pursues expansion opportunities.
“While it is unfortunate to see our streak of 18 consecutive quarters of delivering positive Adjusted EBITDA come to an end, we remain confident that Tantalus is extremely well positioned to deliver next-generation smart grid solutions as the utility industry accelerates their investments to build the grid of the future,” Londa said.
Looking ahead, Leung forecasts modest growth for Tantalus in the coming year, projecting a modest jump to $33.6 million in revenue in 2021, marking potential year-over-year growth of 1.8 per cent before moving to a projected $39 million in 2022, representing potential year-over-year growth of 16.1 per cent.
With its four-year streak now over, Leung projects negative overall adjusted EBITDA of $800,000 for 2021 after reporting $2.6 million to the positive in 2020, then rebounding to a projected $100,000 loss in 2022.
Leung also expects the company to maintain some of its appeal from a valuation perspective, as he projects the EV/Sales multiple to remain at 2.1x in 2021 before dropping to a projected 1.8x in 2022. With increased investment and expansion in play, the EV/EBITDA multiple projects as a negative in 2021 at -88.9x before ballooning to a forecasted -924.9x in 2022.
Overall, Leung continues to believe in what Tantalus is capable of in the bigger picture.
“Despite a tougher-than-expected Q3, we remain positive on Tantalus given the positive industry outlook, its large backlog and the fact that it could benefit from several customer field trials for its grid optimization software converting to full scale deployments,” Leung said. “Beyond 2021, we believe the company could also benefit from the new products such as its next-generation fiber-connected metering solution, particularly with the passing of the $1 trillion US infrastructure bill. We reiterate our Buy rating and C$4.00 target price, which is based on 3.5x CY22e EV/Sales.”
Tantalus, which began trading on the Venture Exchange on February 9 of this year, has seen its share price go from $3.45 to now around the $2.15 mark.
Disclosure: Tantalus Systems is an annual sponsor of Cantech Letter.