KeyStone’s Stock Talk Show, Episode 216.


Great to be back with you this week. Aaron will start by answering a YSOT question on basically a pre-revenue business which has developed new generation power control electronics that could help change how the world optimizes energy by expanding the capabilities of electric motors and batteries. Aaron will break down the company, Exro Technologies Inc. (EXRO:TSX) business, its current fundaments, and growth prospects ahead of the release of our upcoming report on every Electrical and EV related stock in North American markets. I will quickly compare an investment in Exro, versus our choice to recommend client invest in Hammond Power (HPS.A:TSX) to benefit from the Electrification Boom. I will also answer a listener question on Quarterhill Inc. (QTRH:TSX) which operates in the Intelligent Transportation Systems (ITS) and had historically operated in the Intellectual Property (IP) industries – this historically profitable, but lumpy business was just sold. A listener asks whether the sale finally makes this business which we have recommended against in the past, investable. Brennan compares two primarily natural gas producers, Birchcliff Energy Ltd. (BIR:TSX) and Pine Cliff (PNE:TSX) – to identify which offers better value and growth. Finally, Brett answers a question on Dollar General (DG:NYSE), a discount retailer providing various merchandise products across the United States. The stock sold off this week after the business released relatively weak Q1 earnings and more importantly downgraded its guidance for the fiscal year.

Let’s get to the show – my co-hosts Aaron Dunn and the killer B’s, Brett and Brennan.

Question – Does Quarterhill warrant an investment after selling its IP or patent troll division and focusing on the ITS Segment?

Quarterhill Inc. (QTRH:TSX) 

Price: $1.26

Market Cap: $145.02 Million

Company Description: Quarterhill operates in the Intelligent Transportation Systems (ITS) and had historically operated in the Intellectual Property (IP) industries – this historically profitable, but lumpy business was just sold. The company is now a pure play Intelligent Transportation System or ITS business and via its ETC and IRD subsidiaries provide tolling and commercial vehicle weigh-station solutions to government agencies.

Event: Quarterhill sold 90% of its IP business WiLAN for gross proceeds of up to $71.4 million, including $48 million in cash, $8 million in an earnout and $15 million in an unsecured promissory note. Both the earnout and promissory note are subject to WiLAN hitting revenue milestones

Current Financials – as the last year include significant WiLAN revenues and poor margin performance from the continuing ITS segment, looking at current numbers Q1 2023 Financials produces a muddy to terrible picture of the business.

  • Q1 revenues dropped to $44.0 million from $168.5 million in the comparative prior year period. The decrease in consolidated revenue in Q1 2023 was due primarily to the size of licensing agreements completed in Q1 2022.
  • Consolidated Adjusted EBITDA was a loss of ($6.9) million, compared to a gain of $79.1 million in the comparative prior year period. Q1 2022 saw a huge increase in IP revenues.
  • Net loss was ($15.6) million, or ($0.14) per diluted share, compared to a net income of $56.9 million, or $0.50 per diluted share,.

Balance Sheet – Post transaction

Post the sale, Quarterhill should have approximately $30 million in net cash which is expected to be reserved for additional ITS M&A.

Our Take:

The important item to focus on near-term is the  90% sale Quarterhill’s Intellectual Property (IPO business, WiLAN. Given what analyst and original management expectation were at when the company originally contemplated the sale of WiLAN – in the $100 -$200 million range – the deal is underwhelming. I read a report recently stating that the “maximum gross proceeds” were ahead of recently lowered valuations for WiLAN, even this rosy brokerage analysis pointed out that much of the consideration is contingent on WiLAN meeting revenue milestones which creates uncertainty on collectability.

The sale, in theory makes Quarterhill more ‘investable’ and provides additional dry powder to scale the ITS business, but recent ITS performance has not been good. The company’s ETC division has had issues with its 7 tolling implementations which have placed a drag on margins due to revenue mix and cost overruns. As a result, the company is guiding to breakeven Adj. EBITDA in FY 2023. The above mentioned projects are expected to enter the higher margin operation phase in the second half of 2023 and first half of 2024 where gross margins move from 10-15% to 30-40%. As a result, EBITDA margins are expected to increase to 6.7% for $12.5 million of Adj. EBITDA. Good in theory – the in-practice results have most often not matched the theory historically at Quarterhill.

For us, and we have been commenting on this for almost a decade, since the stock was in the $5.00 range — Quarterhill is broken – the company has been through 3-4 management changes, the focus of the business has changed under differing management teams with at the very least 3 different fundamental growth plan in completely differing businesses, often with misaligned management teams with short-term outlooks. Once again, the company may have some cash on hand to start to execute consolidation within the ITS space, but this space has yet to produce real consistent cash flow.

Even if we look at some of the most optimistic estimates for 2024 EBITDA, the company trades at 7-8 times those numbers on an EV/EBITDA basis – not a premium, but the business does not deserve a premium due to continually underperforming forecasts and almost all analysts’ expectations – save from KeyStone’s, which have consistently been negative.

Despite continued share price declines, the business is projected continued losses in 2023, has another interim CEO, weak fundamental performance and the business remains outside our criteria and is not investable at present.

BIR vs PNE (June 2023)

Slide 1

YSOT – Come in from Ryan via email (who is a client). And he wanted me to review Birchcliff Energy (BIR:TSX) – saying “it’s been trading at a lower price lately with a high dividend of 10%. I understand it is commodity driven however oil is not that high right now and the dividend helps while we wait for it to come back up. Based on conversations on Moneytalks, there is a good case to be long term bull on Oil. What are your thoughts?”

Okay so I will answer your question Ryan, and I thought that I would review Birchcliff in relation to Pine Cliff Energy (PNE:TSX), which is another name that I have looked at in the past on the podcast.

So looking at the chart here Pinecliff is the Blue line, and Birchcliff is the Orange line.

Slide 2

Price: $7.67
Market Cap: $2.05 Billion
Forward Dividend Yield: 10.4%

Birchcliff Energy Ltd., an intermediate oil and natural gas company, which acquires, explores for, develops, and produces natural gas (86% of Q1 2023 production.), light oil (3% of production.), condensate (7% of production), and other natural gas liquids (4% of production). The company holds interests in the Montney/Doig resource play located northwest of Grande Prairie, Alberta. Its asset portfolio also includes various other properties, including the Elmworth and Progress areas of Alberta.

Slide 3

Looking at Birchcliff’s financials:
Revenue for Q1 2023 was down 27% primarily due to a reduction in energy prices.
Adj. Funds Flow per share was down 31% (also because of energy prices)
EPS was a loss of $(0.16) per share.
TTM Payout Ratio of 25%.
Net Debt of $205 Million.
Net debt to Adj. Funds Flow of 0.2x.

Now moving on to Pine Cliff.

Slide 4

Price: $1.45
Market Cap: $522.1 Million
Forward Dividend Yield: 8.8%

Pine Cliff is engaged in the acquisition, exploration, development and production of natural gas and oil in the Western Canadian Sedimentary Basin. Like that of Birchcliff, the company primarily produces Natural Gas which is expected to be 85% of production in 2023.

Slide 5

Looking at Pine Cliff’s financials which were reported on May 2nd 2023.
Revenue Q1 2023 was down 18% primarily due to a reduction in the price of natural gas.
Adj. Funds Flow per share and EPS were down 33% and 80%, respectively.
TTM Payout Ratio of 36%.
Net Cash of $58.1 Million.

Slide 6

And just for visualization sake, we can see that both of these companies are highly correlated to the price of natural gas (which is the light blue line on the chart).

Slide 7

To compare the two companies, both are projecting relatively similar growth in production for 2023, but Birchcliff’s long term production projections are appealing (if they can be achieved). Birchcliff pays a better dividend yield of 10.4%, has a lower payout ratio, and a lower valuation multiple. But Pine Cliff’s balance sheet is superior with a net cash position, but this is not to say that Birchcliff’s balance sheet is not healthy (as I would conclude that at this point in time it is).

So to answer the listeners question, yes, I believe that if one is bullish on energy prices and natural gas, Birchcliff could be a higher risk option for investors to speculate on energy… all while collecting the dividend… But as Ryan has said on the podcast before, that over the past 20+ years of his experience he has seen energy producers’ cut and reinstate their dividends time and time again… and is why he has taught me that investing for the dividend in a energy producer can be a very risky game… So keep this in mind if you are interested in investing in either of these names, as the dividend is not guaranteed, and of course there is also no guarantee that the price of energy will increase over the next one to two years… and if energy prices remain depressed or flat… both Birchcliff and Pine Cliff’s share prices will likely perform poorly, and could lead them to cut their dividends.

YSOT Dollar General (DG:NYSE)

Dollar General symbol DG on the NYSE is a discount retailer providing various merchandise products across the United States. The company has over 19000 stores across 47 states located within 5 miles of 75% of the US population. The company currently trades at $164 a share, a market cap of $36 billion with a dividend yield of 1.44%.

However, the stock was recently trading quite a bit higher than it is now. Prior to the Q1 earnings the stock was trading just above $200 a share, falling roughly 18% over night, a significant drop for a historically defensive company.

The market reacted negatively to the relatively weak Q1 earnings and more importantly the company downgrading its guidance for the fiscal year.

A quick rundown of the last quarter,
Net sales increased by 6.8% to $9.3 billion, a 1.6% same stores increase.
Gross profit margin had a slight up tick to 31.63% from 31.29%, attributed to strengthening supply chains year-over-year.
Operating profit was effectively flat at $741 million compared to $746 million.
Where as EPS fell to $2.34 from $2.41

Moving to the company’s outlook.

Dollar General dropped its expectations of sales growth to 3.5% to 5% previously 5.5% to 6.0%, same store sales are now expected to grow by 1 to 2% previously 3% to 3.5%, and EPS is expected to be between an 8% to flat compared to the previously expected 4 to 6% of growth. As well, the company is no longer planning to repurchase shares in the year, to keep its leverage within the 3 times EBITDAR target. Previously the company expected to repurchase $500 million in shares.

The downgrades really comes down to the macro-environment. The company is seeing weak customer demand compared to what is expected. We’ve looked at things like weakening consumer spending and increased debt recently, and Dollar General is seeing the acclimation of these economic stresses placed on the consumer base. As well, the company specifically cites lower tax refunds, and SNAP payments as specific causes for decreased spending.

Now shifting to valuation. Dollar General now trades at 16 times the midpoint of the managements fiscal 2023 guidance, compared to 18 times at $200 a share before the last quarter. So we saw both earnings contraction and multiple contraction when take the change in shares price and expectations change. Dollar General has been at a premium compared to peers previously and is now more in line.


The company had in theory the benefit of being a defensive stock, meaning it is resilient to consumer downturns. However, the company’s fundamentals are deviating from the the fundamentals one would expect given in a textbook defensive stock. The weak consumer scenario that is playing out is still fluctuating and the length is of course unknown, increasing the risk of the company. The valuation is now reflecting the higher than previously expected risk, and isn’t trading at a discount given the updated expectations.

Although I don’t find the company appealing at this time, it could be in the future if the stock price continues to be depressed and if the macro environment becomes more appealing allowing the company to return to EPS growth.

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