Taronis Technologies: Bolt-On Acquisition To Improve Margins
Edison | Feb 22, 2019 02:47AM ET
Taronis Technologies (NASDAQ:TRNX) (formerly MagneGas) has announced its preliminary sales figures for January. In addition, it has acquired an unnamed industrial gas services business based in East Texas for $1.5m, payable in cash. The business adds more than $1m of high-margin service revenues annually and has the potential to cut around $50k of operating expenses each month from the existing operations in East Texas and Louisiana.
Reduction in FY19 losses expected
The acquired business provides high-margin infrastructure test and certification services to a wide range of industrial gas distributors in East Texas and Louisiana, including Taronis, which has nine distribution depots in the area. We raise our FY19 revenue estimate by $0.8m to $19.6m. In addition to the profit generated from providing services to other industrial gas distributors, Taronis will potentially save $50k each month that is currently paid out for these services. We reduce both our FY19 EBITDA and PBT losses by $0.8m to $4.8m and $6.5m respectively. The acquisition emphasises management’s commitment to improving the profitability of the existing distribution platform. Taronis intends to replicate the new service offer across its operations in California and Florida, increasing both revenue and margin in these geographies as well.
February placing funds transaction
The transaction was funded using some of the $13.5m (gross) from the fund-raising announced earlier this month. This involves 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 (0.8x vs 3.0x). We see scope for share price appreciation on positive newsflow regarding cash burn, water decontamination commercialisation and European expansion.
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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.
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