M Partners analyst Nicholas Cortellucci sees growing momentum for Quarterhill Inc (Quarterhill Stock Quote, Chart, Analysts, Financials, News TSX:QTRH), maintaining a “Buy” rating and raising his target price from $3.75/share to $4/share for a projected return of 53 per cent in an update to clients on Friday.
Founded in 1992 and headquartered in Ontario, Quarterhill Inc is a holding company with two subsidiaries: patent licensing (WiLAN) and intelligent transportation systems (IRD & ETC).
Cortellucci’s latest analysis comes after M Partners analysts met with Quarterhill management as well as other clients for a corporate update.
“We continue to be impressed by management’s M&A execution and the growth opportunities in the intelligent transportation systems (ITS) space,” Cortellucci said.
In the dialogue with management, Cortellucci noted company management’s belief that growth in the Quarterhill’s ITS business will continue both organically and through acquisitions, with an expectation for ITS to grow at a 15 per cent CAGR.
In particular, the company expects the acquisition of tolling and mobility system company ETC, which was completed in September, to pay more immediate dividends with a projected $95 million annual run rate, along with a 17.5 per cent CAGR.
“First, it brings scale to our ITS business which enhances the overall financial profile of Quarterhill with more visible and consistent revenue and Adjusted EBITDA,” Paul Hill, President and CEO of Quarterhill, said of the ETC acquisition in the company’s November 10 press release. “Second, it positions us in a vertical – tolling – that we think has significant tailwinds behind it and it also provides us with a second platform in the ITS industry from which we can further accelerate growth via tuck-in acquisitions.”
From the patent licensing side of things, Cortellucci noted a rebound in the company’s third quarter financial results after a slow first half of the year, generating $11.4 million in revenue and $5.4 million in EBITDA to set a pace of $46.5 million in revenue and $23.3 million in EBITDA for 2022.
Meanwhile, according to Cortellucci, the company has over $80 million in cash and equivalents available after recently closing a $57.5 million debt offering, with potentially more to come in the form of a US$109 million windfall from the company’s ongoing trial against Apple, for which a verdict is expected in early 2022.
Cortellucci forecasts a slightly down year for Quarterhill in 2021, with his $132 million revenue projection representing a year-over-year decrease of nine per cent in relation to the $145 million in reported revenue from 2020. However, he expects a big step forward in 2022, forecasting a jump to $249 million in revenue, which would mark an increase of 88.6 per cent.
Meanwhile, Cortellucci also foresees a drop in the company’s adjusted EBITDA for 2021, dipping from the $31 million reported in 2020 to just $14 million in 2021 for a margin of 10.6 per cent. However, much like with revenue, Cortellucci expects a significant jump in 2022, with the $38 million estimate representing not only a margin of 15.3 per cent, but also a year-over-year increase of 171 per cent.
Cortellucci projects the gross margin to follow a similar curve, dropping from 41 per cent in 2020 to a projected 36 per cent in 2021 before rising again to a projected 39 per cent in 2022.
From a valuation perspective, Cortellucci forecasts the EV/Revenue to slightly rise to 2.6x in 2021 from the reported 2.4x in 2021, then dropping to a projected 1.9x in 2022. The shifts in the EV/EBITDA multiple are more dramatic, with Cortellucci forecasting an increase to 25.1x in 2021 from the reported 11.1x in 2020, then getting even better at a projected 9x in 2022.
In terms of relative EV/EBITDA valuation, Cortellucci projects the peer group in patent licensing and assertion to remain fairly steady at 10.9x in 2021 and 10x in 2022, while the Global ITS peer group projects to drop from 18.3x in 2020 to 14.3x in 2021, then to a projected 10.9x in 2022.
Overall, Cortellucci continues to believe Quarterhill is an undervalued option, particularly in relation to its Global ITS peers.
“We highlight that QTRH has the highest expected growth in our ITS peer group and as a result we believe it warrants a premium multiple,” Cortellucci said. “Given that ITS now represents such a large proportion of QTRH’s business going forward, we are transitioning our valuation methodology to a SOTP valuation (previously a DCF).”
“We are maintaining our BUY recommendation and increasing our price target to $4.00/share (previously $3.75/share) based on a sum-of-the-parts valuation,” he said.
Quarterhill’s stock price has seen minimal growth in 2021, yielding a return of 3.1 per cent, having hit an early peak of $3.06/share on February 10. However, Quarterhill has rebounded nicely since bottoming out at $2.20/share on August 12, experiencing a 20 per cent overall jump in its value since then.