Quarterhill is very undervalued, M Partners says

Following the company’s fourth quarter results, M Partners analyst Andrew Hood remains bullish on Quarterhill (Quarterhill Stock Quote, Chart, News TSX:QTRH).

This morning, Quarterhill reported its Q4 and fiscal 2019 results. In the fourth quarter, the company reported net income of $5.6-million on revenue of $39.2-million, a topline that was up 54 per cent over the $25.4-million topline it posted in the same period a year prior.

“Two thousand nineteen saw revenue and adjusted EBITDA growth on both a consolidated basis for Quarterhill as well as with each of our portfolio companies,” QTRH Chairman John Gillberry said. “Adjusted EBITDA in 2019 included a contribution of more than $10-million combined from IRD and Viziya, which reflects the potential of our diversification strategy to generate incremental value for the business. Strong results in 2019 resulted in $86.5-million of working capital at year-end (up $22.4-million from the prior year-end) giving us a solid financial foundation from which to pursue our growth activities in 2020 and beyond. Our CEO search remains well under way and is proceeding in line with our expectations. We have reviewed and met with a number of promising candidates, and we have another round of meetings set up in early March. Should these interviews proceed as expected, we believe we will then be in a position to short list our candidate pool and begin discussions that could lead to an announcement in early spring. While timing is important, the absolute most important consideration is finding the right person with the right blend of skills and experience for the role. In the interim, each of our portfolio companies is in good hands and is being run by a talented and experienced CEO who has played a part in generating the positive results we’ve released today.”

Hood characterized the quarter.

“While financials remain highly unpredictable, the quarter was generally in-line or better than our expectations,” he said. “Revenue in Q4 was $39.2M vs. our expectations of $40.5M, bringing total annual revenue to $146.7M. Recurring revenue was $5.0M in the quarter and $21.1M for the year. Adjusted EBITDA was $12.6M in Q4 vs. our expectations of $11.6M, with the outperformance largely driven by higher gross margins at Wi-LAN (63% vs. 50% expected) and IRD (40% vs. 35% expected). VIZIYA was a drag on the quarter, at 81% gross margin vs. 88% expected, but it is still a compelling high-margin business (91% in 2019) and the weaker quarter was not surprising considering the absence of large contract announcements. SG&A was $1.9M higher than our expectations at $6.6M across the three segments but $0.4M lower at the corporate level at $1.7M. We anticipate cost savings at the Quarterhill level over time, including $1M in annual savings from the NASDAQ delisting announced in December.”

In a research update to clients today, Hood maintained his “Buy” rating and one-year price target of $3.00 on Quarterhill, implying a return of 64 per cent at the time of publication.

Hood thinks QTRH will post Adjusted EBITDA of (US) $13.0-million on revenue of $94.0-million in fiscal 2020.

“At the holdco level, Quarterhill continues to look for a CEO and provided an update in this morning’s press release. They anticipate a potential announcement of a new CEO in early spring. In our view, this will reduce risk surrounding the company, and with the correct CEO in place, could drive a re-rating on the multiple. We are maintaining our BUY rating and $3.00 target price on Quarterhill Inc. based on a DCF analysis,” the analyst concluded.