Taronis Technologies Inc (NASDAQ:TRNX) (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.
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 commercialization and European expansion.
Business description
Taronis Technologies 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.
