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This is written with serious investors in mind. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Monday, March 18, 2019

Friday Filings Portend Potential Positives at QRHC

As I was digesting QRHC's 2018 results last week, I thought: "you know, the CEO deserves a lot of credit." He's taken QRHC from ($1.8M) EBITDA to +$2.3M in EBITDA in two years, partially by shrinking revenues 45%. There's cash flow and bvps growth, and they've done it patiently, in a brutally competitive business.

A patient investor has to admire this.

If QRHC can grow topline, this asset lite business (in theory) has a lot of operating leverage. But after purposefully "un-revenue-ing" in favor of higher gross margin business, the company has been slow to turn the corner to growth; easy comps should yield y/y growth in '19, but it's fair for investors to expect some sequential growth off the bottom.

With 10 days left in the quarter, I'm perplexed why mgmt didn't have the visibility to talk about sequential growth in the year end conference call. It's long been my theory that lack of good technology hinders visibility and scale. It's a solvable problem, but one that management has been frustratingly slow to acknowledge or address.

Cue the "deux ex machina"

A bunch of "Friday Filings" indicate a potential and potentially positive change on the QRHC Board and in ownership, that could help unlock value in the company. If all goes right, Daniel Friedberg of Hampstead Park Capital (formerly of Sagard Capital) will acquire +10% of outstanding shares at $2 and replace Mitch Saltz as Chairman. That would be a very welcome change. It even bears some resemblances to when Nahmad took over at EVI.

There are a lot of moving parts and multiple parties involved, but as I understand it from the public filings ...

Saltz (current Chairman) will sell Freidberg 1.7M shares @ $2 / share via put / call stock agreement

... on the condition that ...

Saltz + 2 co-founders Brian Dick & Jeff Forte can first sell combined 4.3M shares in a secondary offering (at a not unreasonable price, one would presume); Saltz + Forte resign from the board to be replaced by Freidberg's folks; and Freidberg will take over as Chairman

... meaning at the end of all this, if it happens as planned ...

New board
New ownership partially at $2 / share
Saltz will continue to own 11%, Forte 8%, Dick 0%

... which begs the question "is this good, or just different???"

I think this could be very good. There are a few things to love about this ...

I love what I've heard about Freidberg from colleagues and managers he's worked with in the past
I love that this guy is paying $2 / share for at least some of his stake
I love the potential that larger institutional shareholders have the opportunity to get involved
I love that the ownership will be less concentrated in the hands of Saltz and Co.
Yet, I also love that Saltz will continue to own enough to keep "skin in the game" (though he'll be obliged to vote his shares with the new Chair).

... a big difference b/t here and EVI is that Nahmad was from the get go so clearly a dealmaker while Freidberg here paints a picture of a more wonkish, "consultant turned operator". Having spent ~15-years in institutional research analyst before founding LCA, I have seen ways that doesn't work out.

Freidberg's bio indicates he's been involved in a handful of prior companies during periods that mostly align with under-performance. On the surface, a negative, but to be fair, if I were to join a Board, it would start with my investments that I thought needed the most help and that I aimed to try to fix. I think that sample is self selective towards underperformance.

A quick review of  year end 13F-HR's offers some sense of an investment record at Sagard under his watch ...


... some hits & some misses. An apparent value bent. Clearly likes the services companies. Is focused on smaller companies.

Noteworthy that Sagard's total value of stocks as per these filings grew from $200M in 2010 to $385M in 2014 (+17% CAGR), which means he had some success growing his business, before falling back to $180M in 2016 when Freidberg left (I reckon he took some of that with him).

In chatting with folks who've worked with him, I've heard: Smart, thoughtful, diligent, raised points no one else raised, the Board was better with him on it, aggressive but in a friendly way (the kind of thing you'd expect from a Canadian investor).

Assessing all of this will be an ongoing effort but the initial view is that this could be a terrific potential change. Hopefully the deal goes down, not only to have a more involved and engaged Board but specifically to have Dan Friedberg on Board.

At $1.65, QRHC is trading at 12x trailing EBITDA of $2.4M. The way I think about it, if it can get to +$6M EBITDA within three years, this is at least a double for investors. The pathway is topline growth + good technology to better scale overhead. The feedback I have on mgmt is they're a good sales and operating team but weak on tech. These are fixable problems for a team willing to address them. It seems like that team is waiting in the wings.

** Before closing, I wanted to circle back on something...

I am a large shareholder of QRHC but a year ago, its CEO stopped talking to me. It seems to have started when I asked about insider buying though I've been told it started with a question about negative reviews on glassdoor. Subsequent questions, raised after more substantive due diligence, remain ignored.

My older siblings can attest that I can get under people's skin and I am certainly not to everyone's tastes but I have never experienced anything like this since I started in institutional finance in 1999. There's a first for everything.

On one hand, everyone apportions their time how they want and if someone doesn't want to talk with me, they shouldn't have to. On the other hand, I think it's part of the CEO's job to respond when shareholders ask reasonable questions (and if they're not reasonable, at least explain why). I think it benefits all shareholders when potential weaknesses are raised with, and addressed by, management.

Whatever outcome of this investment will be independent of whether or not the current CEO ever talks to me. More watchful and careful eyes will soon be on the Board. They have likely conducted with their own due diligence (I've heard Friedberg is very thorough) and if the questions I've asked are indeed reasonable, this new Board will ask the same ones, likely more tactfully and undoubtedly more impactfully.

I am keen only to see the company operate towards its optimal outcome, something it appears this new Chairman may have the ability to help achieve.

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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF FUTURE RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE, WHICH I MAY OWN.

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