Is a recession in the wind, or perhaps a gale? Where can an investor hide? Though lots of pundits are offering solutions, it is very difficult to do, asserts Benj Gallander, editor of Contra the Heard.
One thought is to look for a sector where projects tend to be long-term in nature, and therefore, less prone to cyclical effects, according to the CEO of Quarterhill (Toronto: QTRH), a small Canadian tech company, which does much of its business in the U.S. Intelligent transportation systems (ITS).
The company provides products and services, such as red light and speed enforcement systems, automated truck weighing stations, toll road systems and equipment, traffic management and safety systems. It does appear that the opportunities are there, especially now that Congress has passed Biden’s Infrastructure Investment and Jobs Act.
Quarterhill is a smallish company, with a market cap under $200 million. This enterprise is in the process of transforming itself. It has a legacy business of patent licensing called WiLAN that provides lumpy cash flow and is undergoing a strategic review, meaning it is for sale.
Management wants to simplify and focus on its intelligent transportation segment. At the same time, Quarterhill is in the early innings of an M&A strategy with ITS. In 2021, around $160 million was spent on three acquisitions.
The scale of the change should make investors pause before taking the plunge. One important aspect is Quarterhill’s management, where there has been some churning, which makes the outfit’s future direction less certain.
In May, they appointed a new CEO for Wi-Lan, a new CFO for Quarterhill and a new board member — the third this year. In December of 2021, Bret Kidd, the head of the newly acquired business, Electronic Transaction Consultants (ETC), replaced the QRTH CEO of a year and a half. His first test is going to be the WiLAN licensing unit.
If sold at a decent valuation, it could spur a rally in the stock. What helped pave the way for a possible deal was the resolution of the patent dispute with Apple (AAPL). It dated back to 2014 and the Cupertino Goliath appealed the final judgment of $108.9 million. In March, it was concluded with no mention of the term — which is unusual.
In Q3, Quarterhill saw operational improvement in the ITS business, with sequential revenue growth of 8 per cent from Q2. The ITS backlog is robust at $770 million. In the past 12 months, $235 million in new business was garnered.
The company has a good balance sheet with cash at $76 million and working capital over $110 million. The price tag for ETC was $150 million, half paid in debt. They signed a $57.5 million bought deal offering convertible debentures with a coupon of 6 percent, a conversion price of $3.80 and a maturity date of 2026.
It looked pricey at the time, but considering the spike in interest rates, it is almost a bargain. In Q3, another $20.8 million of the obligation was repaid, making a total reduction of $35.3 million this year. Senior debt is now $30.2 million at quarter end, down a distance from $62 million last year.
Our initial sell target is $4.84. While waiting and hoping patiently for this outcome, a dividend that is better than 3 per cent is being collected. Being paid to be patient is almost always a good thing.
