Taronis Technologies (formerly MagneGas) has completed the acquisition of one of the largest independently owned industrial gas distributors in Los Angeles, California, for $2.5m, payable in cash. The business adds $4.5m annualised sales, five depots in the Los Angeles area and a sales route to the Baja California and Sonora regions of Mexico. Importantly it completes the first phase of the acquisition programme initiated in 2017, creating a platform that management intends to deliver at least $100m revenues within five years.
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Taronis Technologies |
Los Angeles acquisition completes platform |
Acquisition |
Alternative energy |
28 February 2019 |
Share price performance
Business description
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Taronis Technologies is a research client of Edison Investment Research Limited |
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Taronis Technologies (formerly MagneGas) has completed the acquisition of one of the largest independently owned industrial gas distributors in Los Angeles, California, for $2.5m, payable in cash. The business adds $4.5m annualised sales, five depots in the Los Angeles area and a sales route to the Baja California and Sonora regions of Mexico. Importantly it completes the first phase of the acquisition programme initiated in 2017, creating a platform that management intends to deliver at least $100m revenues within five years.
Year end |
Revenue (US$m) |
EBITDA |
PBT* |
EPS* |
DPS |
EV/sales |
12/16 |
3.6 |
(9.6) |
(10.3) |
(620.5)** |
0.0 |
3.4 |
12/17 |
3.7 |
(10.3) |
(11.0) |
(306.2)** |
0.0 |
3.3 |
12/18e |
10.0 |
(11.5) |
(13.7) |
(4.3)** |
0.0 |
1.2 |
12/19e |
23.4 |
(4.2) |
(6.0) |
(0.3) |
0.0 |
0.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Adjusted for reverse share splits.
Potential for margin improvement
The acquisition cements Taronis’s position in California, where it already has depots further north in the Sacramento area and further south in the San Diego area. We raise our FY19 revenue estimate by $3.8m to $23.4m. We reduce our FY19 PBT losses by $0.5m to $6.0m. The purchase gives sufficient scale in California, which is one of the two largest markets for industrial gases in the US, to justify constructing MagneGas production facilities in California, eliminating the cost of transporting the gas from Florida and making it more cost-competitive with conventional metal cutting fuels. Our estimates exclude any benefit that may arise from selling higher volumes of MagneGas across the extended platform, or cost-savings arising from initiatives such as producing MagneGas in California, having a bulk gas fill plant in Florida and post-acquisition rationalisation. Management has previously noted that revenues need to be $20–23m annually for the group to be profitable. We will adjust our cost estimates as information on the level of cost-savings being achieved is disclosed in future SEC filings.
Recent placing funds transaction
The transaction was funded using some of the $13.5m (gross) from the fund-raising announced earlier this month. This involved a placing of 10.8m new shares at $1.25/share, together with warrants to purchase up to 8.1m new shares, also exercisable at $1.25/share. While this has had a highly dilutive impact, management notes that the group is now well funded for the foreseeable future.
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 (0.5x vs 3.0x). We see scope for share price appreciation on positive newsflow regarding cash burn, water decontamination commercialisation and European expansion.
Exhibit 1: Financial summary
Accounts: GAAP; year end 31 December; US$000s |
|
2016 |
2017 |
2018e |
2019e |
|
INCOME STATEMENT |
|
|
|
|
|
|
Total revenues |
|
|
3,552 |
3,719 |
9,951 |
23,358 |
Cost of sales |
|
|
(2,018) |
(2,217) |
(6,380) |
(11,886) |
Gross profit |
|
|
1,534 |
1,503 |
3,571 |
11,471 |
SG&A (expenses) |
|
|
(10,479) |
(11,664) |
(15,053) |
(15,349) |
R&D costs |
|
|
(679) |
(172) |
(12) |
(360) |
Other income/(expense) |
|
|
0 |
0 |
0 |
0 |
Exceptionals and adjustments |
|
(1,856) |
50 |
0 |
0 |
|
Depreciation and amortisation |
|
(651) |
(673) |
(1,317) |
(1,680) |
|
Reported EBIT |
|
(12,130) |
(10,956) |
(12,811) |
(5,917) |
|
Finance income/(expense) |
|
(52) |
(15) |
(895) |
(54) |
|
Other income/(expense) |
|
50 |
(2) |
0 |
0 |
|
Exceptionals and adjustments |
|
(5,338) |
(52) |
0 |
0 |
|
Reported PBT |
|
|
(17,470) |
(11,024) |
(13,706) |
(5,972) |
Income tax expense (includes exceptionals) |
|
|
0 |
(4,974) |
0 |
0 |
Reported net income |
|
|
(17,470) |
(15,999) |
(13,706) |
(5,972) |
Basic average number of shares, m* |
|
|
0.0 |
0.0 |
3 |
20 |
Basic EPS ($) |
|
|
(52.74) |
(22.22) |
(4.3) |
(0.3) |
Adjusted EBITDA |
|
|
(9,623) |
(10,333) |
(11,494) |
(4,237) |
Adjusted EBIT |
|
|
(10,274) |
(11,006) |
(12,811) |
(5,917) |
Adjusted PBT |
|
|
(10,276) |
(11,022) |
(13,706) |
(5,972) |
Adjusted EPS* ($) |
|
|
(620.45) |
(306.21) |
(4.29) |
(0.29) |
Adjusted diluted EPS* ($) |
|
|
(620.45) |
(306.21) |
(4.29) |
(0.29) |
BALANCE SHEET |
|
|
|
|
|
|
Property, plant and equipment |
|
|
6,403 |
6,865 |
9,961 |
10,337 |
Goodwill |
|
|
2,109 |
2,109 |
3,359 |
7,359 |
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 |
20,368 |
Cash and equivalents |
|
|
1,616 |
587 |
10,759 |
14,383 |
Inventories |
|
|
1,616 |
739 |
1,908 |
5,700 |
Trade and other receivables |
|
|
443 |
390 |
1,908 |
2,560 |
Other current assets |
|
|
226 |
198 |
198 |
198 |
Total current assets |
|
|
3,901 |
1,913 |
14,774 |
22,841 |
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 |
3,520 |
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 |
4,319 |
Equity attributable to company |
|
|
3,829 |
7,819 |
27,003 |
38,362 |
CASH FLOW STATEMENT |
|
|
|
|
|
|
Profit before tax |
|
|
(17,470) |
(11,024) |
(13,706) |
(5,972) |
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 |
(877) |
Interest paid / received |
|
|
0 |
0 |
(895) |
(54) |
Income taxes paid |
|
|
0 |
0 |
0 |
0 |
Cash from operations (CFO) |
|
|
(8,640) |
(4,788) |
(10,055) |
(4,838) |
Capex |
|
|
(1,425) |
(129) |
(1,510) |
(2,010) |
Acquisitions & disposals net |
|
|
0 |
(325) |
(8,107) |
(6,500) |
Other investing activities |
|
|
(55) |
(0) |
0 |
0 |
Cash used in investing activities (CFIA) |
|
|
(1,480) |
(454) |
(9,617) |
(8,510) |
Net proceeds from issue of shares |
|
|
6,422 |
5,008 |
30,423 |
17,000 |
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 |
16,973 |
Increase/(decrease) in cash and equivalents |
|
|
(3,703) |
(1,030) |
10,172 |
3,624 |
Cash and equivalents at end of period |
|
|
1,616 |
587 |
10,759 |
14,383 |
Net (debt)/cash |
|
|
987 |
(576) |
10,175 |
13,827 |
Source: Taronis Technologies accounts, Edison Investment Research. Note: *Adjusted for reverse share splits.
|
|
Windar’s revenues from product sales grew by 80% year-on-year during FY18, enabling it to reduce EBITDA losses from €1.2m to €0.4m. Growth was slower than expected because of supply chain issues. Although these issues have now been resolved, they have a knock-on effect on follow-on orders for FY19, so we reduce our estimates for both forecast years.