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GRoDT follow-ups ?3
20:57 10-Nov-20
I've saved GRoDT follow-ups for last today because this is a very dangerous market for them, and the opportunities are, of course, speculative and hardest to project from a time perspective. None of what's here changes my already stated viewpoints very much, but the color could easily be very useful to refer to going forward.
I'll start with Resonant, whose conference call was intensely painful because most analysts just don't seem to understand the technology. Unless management is straight up lying, I think we are now past the point where it's reasonable to doubt that this company has disruptive technology. The main reveal on this point was that the company added two more XBAR foundry proof points, for a total of six. Making a better filter cheaper is all Resonant needs to hit the big time. I suppose it's possible that Samsung or Qorvo has some competitive process that is a closely held secret, but even if that were the case, Resonant's technology would still be extremely valuable for competitive reasons. However, the technological filter kludges currently being used mean that would only become apparent as 5G networks deployments get more dense.
So for now, the question is when Resonant's advantages will be reflected in the market price, and the answer remains "by 2022", which brings us back to what I've been saying about further dilution and shifty management. Analysts have been focusing on the revenue ramp, but now that we have some part counts, that becomes somewhat secondary. The middling revenue is excusable in my eyes because we're dealing with older 3G filter designs whose pricing has dropped 80% or more recent years. Resonant's current Chinese filter contracts are pre-paid royalties, but convert to per-unit payments at pre-set levels, probably in early 2022 if all goes well. Two more milestone payments are all it will be getting from Murata on the four contracted designs in that time frame. Similarly, its newer, higher margin designs won't start to ramp until the latter half of next year, and expenses will ramp back up in the meantime.
So return on a current investment is only likely to be realized through a buyout in the next two years, even assuming that rollouts stay on schedule. Furthermore, it's entirely possible that management could give ordinary shareholders the short end of the stick in such a process. Even so, I see the the technology as too compelling to ignore completely. Wireless providers will be forced to at least try to recoup enormous spectrum costs; massive MIMO on base stations but is yet another example of the huge opportunity, but one that will require new engineering, and thus time. Such is the nature of GRoDT investing.
I'll recap the Xebec and Westport calls together as they are both tied to natural gas. Both are being helped by Biden's promise to have America to rejoin Paris accord as soon as he is inaugurated. I also think both are underestimating the possibly that relations with China remain quite difficult. If so, though, one interesting point from the Xebec call was that a North American manufacturing push will require compressed air in every factory.
The Xebec call also confirmed the integration costs I'd anticipated. Revenue was up 39% YoY, but margin was down 7%. SG&A expenses as a percentage of revenue this were 31% compared to 20% last year. Some of this was due to the pandemic, but much is outsourced legal & due diligence. Xebec's still plans to buy 3-5 companies for the next few years, with M&A DD outsourcing continuing for 6-9 months. Over time this will contribute to service revenue which is half of revenue, but in the meantime it probably means subpar earnings. The only true one-off expense was for TSX uplisting, at ~$150K. More specific guidance should with next call, but management did say it is targeting revenue upwards of $100M next year.
More impressive growth is probably more than a year off. Quebec Capital is evaluating 10 projects now, but it will not contribute to bottom line this year or next. The Canadian fuel standard, should have been updated already, which calls into question finalization in a year, and putting measures into force in 2022. When and if it does come to pass, management expects 600-800 projects. After that we'll look for movement on Canada's initiative to have 70% of organic waste to RNG by 2025, all of it by 2030. On that front, Xebec has BioStream standardization nearly complete, and plans its European launch in France, Italy and Spain for 2Q21. In the meantime, management says it is nearly ready to train new employees throughout 2021. I see expenses ramping.
Westport being at a later stage of development probably explains why the market was a little kinder to it today. HPDI is showing decent traction with sales up 50% YtD, albeit from a meaningless base. Management expects demand to continue rebounding this quarter, and there are some hopes for future growth. The next phase of E.U. guidelines is expected in April, and Egypt going to all natural gas vehicles. The China market is what really matters, though, as it represent 100K vehicles/year, and management could provide no color whatsoever on certification. Volume is critical to Westport's margins, especially since European pricing has stepped down over time, and will continue to do so to a smaller degree. Westport has a great product, and it's safer than the other GRoDT stocks in many ways, but until American policy is clear, the diminished opportunity just isn't attractive enough to me in this environment.