Quarterhill is an undervalued stock, M Partners says

M Partners’ Paul Piotrowski delivered an update to clients on October 8 on Quarterhill (Quarterhill Stock Quote, Chart, News TSX:QTRH), with the analyst saying the company’s bulked up balance sheet should be good for its M&A ambitions.

Piotrowski reiterated his “Buy” recommendation and $3.00 target price, which at press time represented a projected 12-month return of 47 per cent. Kitchener, Ontario-headquartered Quarterhill has two subsidiaries, WiLAN, a patent licensing and assertion business and Intelligent Road Dynamics, a highway traffic management tech company. The company announced on October 8 preliminary numbers for its upcoming third quarter 2020, set to be released on November 5.

Quarterhill reported preliminary consolidated revenue in the range of $80 to $87 million and adjusted EBITDA between $32 and $36 million. That would compare with last year’s Q3 revenue at $25.4 million and adjusted EBITDA at $2.0 million.

President and CEO Paul Hill called the Q3 2020 an exceptional quarter for the company’s two portfolio businesses.

“Consistent with its track record, we again see the favourable and sizeable impact that WiLAN can have on our overall revenue and cash flow. These periodic cash flow contributions are a valuable component in supporting our broader M&A strategy within the Intelligent Transportation Systems (ITS) industry and to support growth initiatives at WiLAN itself,” said Hill in a press release.

Reflecting on the numbers, Piotrowski said the revenue and EBITDA would be well ahead of his calls for an $18.1-million topline and adjusted EBITDA of $2.5 million. The analyst said QTRH’s strengthened balance sheet should support its M&A strategy, which is centered on IRD and the ITS industry, along with Quarterhill’s capital return program. (QTRH’s dividend yield currently sits at two per cent.)

“We expect to see a significant improvement to QTRH’s already strong cash balance, providing a higher floor for its share price. Last quarter, the Company reported cash of $143.1 million (or $1.20/share). We expect to see the cash balance improve to ~$170 million (or $1.45/share), which does not include the potential windfall of US$109 million from the ongoing Apple case (though we do not expect payment until late 2021 at the earliest),” Piotrowski wrote.

The analyst also noted Quarterhill’s new agreements reached since last quarter with Kingston Technology, Konica Minolta, IBM and Intel. Piotrowski called growth in QTRH’s IRD business impressive, with a string of new contracts for Weigh-in-Motion systems in Paraguay, a US$2-million support and maintenance service contract in New York, a US$3.3-million commercial vehicle enforcement systems contract in Ukraine and a US$1.2-million WIM systems contract with the US Federal Highway Administration Office (FHAO) of Infrastructure Research and Development.

Looking ahead, Piotrowski thinks QTRH will deliver revenue and adjusted EBITDA for 2020 of $141 million and $32 million, respectively.

The FHAO Weigh-in-Motion systems contract, announced on October 5 and valued at $1.2 million, will see IRD apply its WIM systems at the FHAO’s Long-Term Pavement Performance (LTPP) test sites across the US and Canada. IRD President and CEO Rish Malhotra said in a press release, “IRD’s WIM technology has been instrumental in ensuring the success of the LTPP program since 2004 and is the basis on which we have built a long and trusted relationship with the U.S. Department of Transportation.”