Quarterhill upgraded to buy at Paradigm Capital

He warns that 2018 might be a bumpy ride for investors, but Paradigm Capital analyst Daniel Kim says he has seen enough positive things happen of late that he can recommend investors buy Quarterhill (Quarterhill Stock Quote, Chart, News: TSX, Nasdaq: QTRH) again.

On Monday, Quarterhill announced that because of strong results from its Wi-LAN subsidiary, it expects revenue for the third quarter will come in at between $72.5-million and $82.5-million, and that EBITDA would be between $50.0-million and $56.0-million.

“We are very pleased to have such a substantial contribution from Wi-LAN this quarter,” said interim CEO Shaun McEwan. “As we have said in the past, financial results in this segment of our business can be variable from quarter to quarter and this is a prime example of the upside potential of this variability. Our expected results for the third quarter will provide a significant boost to our cash position, which will assist in the continued growth of Quarterhill.”

Kim says despite looming changes there is deep value in Quarterhill.

“On the back of a strong license renewal, which was in part motivated to get a jump on pending accounting changes commencing in the New Year, QTRH updated its thirdquarter outlook with record guidance,” the analyst notes. “This announcement has pushed the valuation of the shares back into buy territory, in our opinion, trading at 1.9x 2017e EV/EBITDA and 3.6x P/E. In this note, we provide a base-case and high-case analysis, which suggests there is meaningful unlocked value in these shares. We caution investors, however, the ride beginning in 2018 will get bumpier.”

In a research update to clients today, Kim upgraded Quarterhill from “Hold” to “Buy” and raised his one-year price target on the stock from $2.00 to $2.75.

Kim thinks Quarterhill will generate EBITDA of $60.1-million on revenue of $132.7-million in fiscal 2017. He expects those numbers will fall to EBITDA of $21.4-million on a topline of $109.1-million the following year.