Quarterhill Inc
Ticker: QTRH CN/ QTRHF US
Market Cap:C$168M
Price: C$1.45
EV/EBITDA= 4 x
Price Target= C$7.00+
www.quarterhill.com
Overview:
Quarterhill is an under the radar Canadian technology holding company in the middle of a strategic turnaround due for a re-rate higher now that they have sold off a legacy patent licensing business to focus on their high-growth, high margin, recurring revenue Intelligent Transportation Systems (ITS) business. Historically, QTRH was founded as a wireless technology company which transitioned into a two part holding company focused on 1) patent licensing and 2)Intelligent Transportation systems. The patent licensing business acquired tech patents and then licensed them to corporations for use, the model relied on the threat of legal action. The ITS segment specializes in anything related to road technology such as truck and bridge weighing/monitoring systems, cloud-based tolling, mobile systems, managing traffic flow, back-office solutions, etc. In terms of broad secular themes, the improvement of roads via major investment in infrastructure will be a tailwind QTRH stands to benefit from. Government debts are high, demand for efficient tolling solutions could be explored as a possible solution for revenues, leading to increased demand for the services of QTRH. Emissions tracking will continue to be a focal point for environmentally conscious states going forward. All themes that benefit QTRH.
On June 16th, QTRH announced the sale of Wilan, its legacy patent licensing unit, to Owl Point (known for their expertise in intellectual property monetization) for $71M. The deal was structured as $48M cash upfront, plus $23M in earnouts if they can achieve certain targets, with an additional $15M in upside for a remaining 10% equity stake in Wilan. The sale of Wilan should give comfort to investors that have avoided the name due to the blackbox and lumpy cashflow nature of this business segment.
Also, QTRH has also been plagued by poor management teams that investors have vocally objected to. The company and existing board have recently reshuffled the board and are actively pursuing a new CEO to take the helm. It’s been a long process but meaningful steps are being made in the c-suite to improve corporate governance and attract talent to the helm that will drive value creation in a fundamentally strong business.
A combination of factors have led to the recent underperformance of the stock. Poor managment. A lumpy, blackbox business segment within patent licensing. And lastly, cost overruns in the initial stages of their recently won ITS contracts have all weighed on the stock.
The company is now in the early stages of a turnaround that will offer attractive upside for new entrants. With the sale of Wilan behind them, the company will focus their attention on the continued integration of their ITS business with a current backlog of more than USD$500M in contracted revenues. Mgmt is currently targeting positive adjusted EBITDA as they ramp up into the operating stage of current capex cycle, with margins and EBITDA expected to improve in 2023/24. The search for a new CEO should be completed this summer which should be another positive catalyst for the stock. Once a new CEO is named I expect the company will engage in aggressive marketing campaign with investors which could include a rebranding to showcase the new direction the company is heading toward- yet another catalyst as it will attract more attention to a stock trading at a discount 4x EV/EBITDA multiple where similar Small Cap Tech stocks should be trading around 12X+.
Financials:
Given the ongoing restructuring and recent sale of Wilan, the numbers are difficult to dig into. So using the first quarter of when the ITS and ETC business were first reported together (Q4 2021) we get an EBITDA run rate of $16M or 10% ebitda margins. If mgmt can hit 15% goal in the short term that could quickly bring up the ebidta run rate to $24M and onwards. 30% margins are not unrealistic in the near future.
Following the sale of Wilan, QTRH has a cash position of $108M and $77M of debt. Part of the sale press release noted that interest coverage on debt would be waived until the end of this year- at which point they will reset.
Shareholders and liquidity:
Currently the stock is held byfew institutional investors: Foyston Gordon & Payne (10%), Connor Clark & Lunn, Dimensional FUnd, Blackrock Canada, mgmt, and other fundamental value investors. The stock is relatively illiquid, which means that as the story starts to hit the radar of large funds they will have to accumulate their position in the open market where the supply they need will require moving the price notably higher. This is an ideal entry point for small investors willing to wait out 1-2 years for multibagger potential.
Conclusion:
Overall, Quarterhill is an underfollowed story, trading at a discount which could conservatively trade at a 12x ev/ebitda multple (no immediate publicly listed peers for this industry). The company has a number of catalysts on the horizon that offer early investors an opportunity to participate in significant gains:
-continue ITS integration
-achieve positive ebitda as they enter operating stage of recent projects
-hire new CEO
-rebrand, change name, aggressive marketing/Investor relations campaign
-and lastly, there is always potential for takeout by an Alphabet looking to get more involved in Smart Cities or a large infrastructure operator
I encourage everyone to read their latest financials and check out the investor deck in the link above.
Please let me know your thoughts