Continuing with build-and-buy strategy

Taronis Technologies 5 February 2019 Update (1-4pgs)
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Taronis Technologies

Continuing with build-and-buy strategy

Acquisition

Alternative energy

5 February 2019

Price

US$2.99

Market cap

US$28m

Net cash (US$m) at end September 2018

0.9

Shares in issue (after 20:1 reverse share split)

9.3m

Free float

99.9%

Code

MNGA

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(40.2)

(38.2)

(92.7)

Rel (local)

(44.4)

(38.2)

(92.6)

52-week high/low

US$35.8

US$2.8

Business description

Taronis is a technology company that has developed a plasma-based system for renewable fuel gasification and water decontamination. This process generates a hydrogen-based fuel called MagneGas as a by-product that is sold as an alternative metal-cutting fuel to acetylene.

Next event

Q418 results

April 2019

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Taronis Technologies is a research client of Edison Investment Research Limited

Taronis Technologies (formerly MagneGas) has continued with its ‘buy-and-build’ strategy, recently completing the acquisition of one of the largest remaining independent industrial gas and welding supply distributors in East Texas for $2.5m in cash. Together with the acquisitions completed during 2018, this takes the group closer to achieving its goal of creating a profitable platform for selling metal-cutting gases and associated products. The cash generated from gas sales will be used to help commercialise its proprietary technology for renewable fuel gasification and water decontamination.

Year end

Revenue (US$m)

EBITDA
(US$m)

PBT*
(US$m)

EPS*
(US$)

DPS
(US$)

EV/Sales
(x)

12/16

3.6

(9.6)

(10.3)

(620.5)**

0.0

7.5

12/17

3.7

(10.3)

(11.0)

(306.2)**

0.0

7.3

12/18e

10.0

(11.5)

(13.7)

(4.29)**

0.0

2.7

12/19e

18.8

(5.6)

(7.3)

(0.79)**

0.0

1.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Adjusted for reverse share splits.

Acquisition strengthens presence in key geography

In January, Taronis completed the acquisition of a substantial independent industrial gas and welding supply distributor in East Texas, thus adding c $3.7m annualised sales and strengthening its retail network in the key Greater Texas region. This follows the purchase of six other businesses during FY18 in the greater California and Texas regions. Collectively these acquisitions enabled the group to generate $1.0m in sales during December 2018 compared with $0.3m for the same month in 2017. Both November and December sales are typically lower than average because of the public holidays in both months.

Private placing finances transaction

In December 2018, the company announced that 98% of the $25m Series C Convertible Preferred financing instrument issued in June 2017 had been converted. This had been the primary source of finance during the intervening period. In January, the company raised $4.3m (gross) through a private placing at $0.14/share, part of which was used to fund this latest acquisition. Management notes that the group needs to generate revenues of $20-23m annually for it to be profitable, with further acquisition the preferred route to close the gap. Additional finance will be required to fund this expansion, or if underlying cash burn continues at the level modelled for FY19 into FY20.

Valuation: Trading at a discount to peers

Taronis’s shares are trading at a substantial discount to the EV/sales mean of our sample of suppliers of industrial gases for 2019 (1.4x vs 3.0x). We see scope for share price appreciation on positive newsflow regarding cash burn, water decontamination commercialisation and European expansion. This would give greater clarity on future funding requirements and potential dilution as well as the likelihood of further estimates downgrades.

Revisions to estimates

We have revised our estimates to reflect:

The acquisition made in January 2019, which adds $3.7m annualised sales.

Slower organic growth than we previously modelled, resulting in an average monthly run rate excluding the acquisition made in January 2019 of $1.17k/month rather than $1.28k/month as previously expected.

$4.3m (gross) funds raised from a Placing in January 2019, together with the issues of 31.0m new shares and warrants to purchase up to 31.0m new shares.

Dilutive effect of conversion of remaining Series C Convertibles during Q418.

20:1 reverse share split at end January 2019.

Exhibit 1: Changes to estimates

Year end December

FY17

FY18

FY19

($m)

Actual

New

Old

% change

New

Old

% change

Revenues

3.7

10.0

10.3

-4.0%

18.8

16.8

10.5%

EBITDA

(10.3)

(11.5)

(11.4)

1.2%

(5.6)

(5.6)

-0.7%

PBT

(11.0)

(13.7)

(13.6)

1.0%

(7.3)

(7.7)

-5.8%

EPS ($)

(306.2)

(4.3)

(0.2)

95.1%

(0.8)

(0.1)

92.9%

Source: Edison Investment Research

Valuation

Although there is potential for Taronis to start generating revenues from the sale of sterilisation equipment, the provision of sterilisation services during FY19 or sales of MagneGas in Europe, we treat these sources as upside to our estimates. Consequently, our estimates are based solely on revenues derived from US sales of industrial gases and associated equipment. We have therefore selected a sample of listed companies supplying industrial gases for our valuation. We note that Taronis is trading at a substantial premium to the mean with regard to historical EV/sales multiples (7.3x vs 2.0x), which is the period before the rapid growth from acquisitions, at a small discount to the mean EV/sales multiple for 2018 (2.7x vs 3.2x), which does not show the full year benefit for the acquisitions, and at a substantial discount to the mean multiple for 2019 (1.4x vs 3.0x), which is when the full benefit of the acquisitions becomes apparent. While some discount for Taronis’s small market capitalisation and level of losses is justified, its exceptionally strong projected sales growth would generally be expected to partly counteract this. However, while there is potential for significant share price appreciation as the full benefit of the recent acquisitions becomes clear, commentary in the most recent SEC filing stating substantial doubt about the company’s ability to continue as a going concern given the need to raise additional finance is hindering share price development because of investor concerns about potential dilution.

The share price has fallen by almost 40% since the announcement of the reverse share split on 30th January which appears to have stoked speculation about impending stock dilution. However, the fundamentals have not changed. The substantial acquisition made in January takes the group closer to reaching break-even purely from sales of industrial gases and related accessories. The project with the US Department of Agriculture to validate the water decontamination application appears to be on track, as are the initiatives to establish MagneGas generation facilities in mainland Europe, secure EU funding to develop the next generation of gasification technology and to undertake a water decontamination project at a very large dairy farm in the Netherlands. In our view, investors should be more interested in how close the combination of successive acquisitions and rationalisation takes the group to break even, which will be clearer when the Q418 and Q119 results are announced, provisionally in April and May respectively, and on whether commercialisation of the water decontamination technology and expansion in Europe, both of which present substantial upside to our estimates, are proceeding to plan. Information on these issues will give investors a better view of additional funding requirements, and potential dilution of their shareholdings, and of the risk of further estimate downgrades. Given the size of the Year 2 EV/Sales multiple discount to peers, positive newsflow on cash burn, technology commercialisation and European expansion has the potential to reassure investors and drive a recovery in the share price.

Exhibit 2: Peer multiples

Name

Market cap ($m)

EV/Sales
last (x)

EV/Sales
FY1 (x)

EV/Sales
FY2 (x)

CAGR
(%)* 

Air Liquide

52,338

3.0

2.9

2.8

4%

Air Products and Chemicals

36,435

4.2

4.0

3.7

6%

Koatsu Gas Kogyo Co

390

0.4

-!

-!

-

Linde

41,324

2.6

2.5

2.4

2%

Maxima Air Separation Center

74

2.2

-

-

-

SOL

1,090

1.6

-

-

-

Toho Acetylene Co

87

0.2

-

-

-

Mean

2.0

3.2

3.0

Taronis Technologies

28

7.3

2.7

1.4

125%

Source: Refinitv estimates, Edison Investment Research. Note: Prices at 4 February 2019. *Year 0 to Year 2.

We note that the multiple paid for the most recent acquisition was 1.5x historic sales, which is a discount to the listed peers and Taronis itself.

Exhibit 3: Financial summary

Accounts: GAAP, Yr end: December, USD: Thousands

 

2016

2017

2018e

2019e

Income statement

 

 

 

 

 

 

Total revenues

 

 

3,552

3,719

9,951

18,774

Cost of sales

 

 

(2,018)

(2,217)

(6,380)

(9,668)

Gross profit

 

 

1,534

1,503

3,571

9,107

SG&A (expenses)

 

 

(10,479)

(11,664)

(15,053)

(14,332)

R&D costs

 

 

(679)

(172)

(12)

(360)

Exceptionals

 

(1,856)

50

0

0

Depreciation and amortisation

 

 

(651)

(673)

(1,317)

(1,680)

Reported EBIT

 

 

(12,130)

(10,956)

(12,811)

(7,265)

Finance income/(expense)

 

 

(52)

(15)

(895)

(54)

Other income/(expense)

 

 

50

(2)

0

0

Exceptionals

 

(5,338)

(52)

0

0

Reported PBT

 

 

(17,470)

(11,024)

(13,706)

(7,319)

Income tax expense (includes exceptionals)

 

 

0

(4,974)

0

0

Reported net income

 

 

(17,470)

(15,999)

(13,706)

(7,319)

Basic average number of shares, m

 

 

0.0

0.0

3

9

Basic EPS

 

 

(52.74)

(22.22)

(4.3)

(0.8)

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

(9,623)

(10,333)

(11,494)

(5,585)

Adjusted EBIT

 

 

(10,274)

(11,006)

(12,811)

(7,265)

Adjusted PBT

 

 

(10,276)

(11,022)

(13,706)

(7,319)

Adjusted EPS*

 

 

(620.45)

(306.21)

(4.29)

(0.79)

Adjusted diluted EPS*

 

 

(620.45)

(306.21)

(4.29)

(0.79)

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

Property, plant and equipment

 

 

6,403

6,865

9,961

10,337

Goodwill

 

 

2,109

2,109

3,359

3,359

Intangible assets

 

 

437

412

2,366

2,321

Other non-current assets

 

 

27

352

352

352

Total non-current assets

 

 

8,975

9,739

16,038

16,368

Cash and equivalents

 

 

1,616

587

10,759

4,475

Inventories

 

 

1,616

739

1,908

5,072

Trade and other receivables

 

 

443

390

1,908

2,057

Other current assets

 

 

226

198

198

198

Total current assets

 

 

3,901

1,913

14,774

11,802

Non-current loans and borrowings

 

 

620

584

556

529

Other non-current liabilities

 

 

0

0

0

0

Total non-current liabilities

 

 

620

584

556

529

Trade and other payables

 

 

416

1,717

2,454

2,829

Current loans and borrowings

 

 

9

579

27

27

Other current liabilities

 

 

8,002

954

772

772

Total current liabilities

 

 

8,428

3,250

3,253

3,628

Equity attributable to company

 

 

3,829

7,819

27,003

24,014

 

 

 

 

 

 

 

Cash flow statement

 

 

 

 

 

 

Profit before tax

 

 

(17,470)

(11,024)

(13,706)

(7,319)

Net finance expenses

 

 

0

0

895

54

Depreciation and amortisation

 

 

651

673

1,317

1,680

Share based payments

 

 

347

425

330

330

Other adjustments

 

 

8,515

3,024

1,955

0

Movements in working capital

 

 

(682)

2,114

49

(437)

Interest paid / received

 

 

0

0

(895)

(54)

Income taxes paid

 

 

0

0

0

0

Cash from operations (CFO)

 

 

(8,640)

(4,788)

(10,055)

(5,747)

Capex

 

 

(1,425)

(129)

(1,510)

(2,010)

Acquisitions & disposals net

 

 

0

(325)

(8,107)

(2,500)

Other investing activities

 

 

(55)

(0)

0

0

Cash used in investing activities (CFIA)

 

 

(1,480)

(454)

(9,617)

(4,510)

Net proceeds from issue of shares

 

 

6,422

5,008

30,423

4,000

Movements in debt

 

 

0

0

(552)

0

Other financing activities

 

 

(5)

(795)

(27)

(27)

Cash from financing activities (CFF)

 

 

6,416

4,213

29,844

3,973

Increase/(decrease) in cash and equivalents

 

 

(3,703)

(1,030)

10,172

(6,284)

Cash and equivalents at end of period

 

 

1,616

587

10,759

4,475

Net (debt) cash

 

 

987

(576)

10,175

3,919

Movement in net (debt) cash over period

 

 

(3,773)

(1,563)

10,751

(6,257)

Source: Company data, Edison Investment Research. Note:*Adjusted for reverse share splits.

General disclaimer and copyright

This report has been commissioned by Taronis Technologies and prepared and issued by Edison, in consideration of a fee payable by Taronis Technologies. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Taronis Technologies and prepared and issued by Edison, in consideration of a fee payable by Taronis Technologies. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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