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Assignment
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1001032438
1-page Critique

Course Code:

RSM2312

Course Title:

Value Investing

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Eric Kirzner, Maureen Stapleton

1001032438

Questor Technology Inc. Presented by Toronto Bulls

Strong sectorial headwinds Questor Technology Inc. designs, manufactures, sells, and leases waste
gas incinerators, provides combustion and burner-related oilfield services, and offers waste heat to
power generation systems. However, major chunk of revenues (80%-85%) come by selling incinerators
to oil and natural gas industry in Canada and US. Revenues for Questor are highly dependent on how
many new oil wells are getting drilled. Given the sharp oil price decline, oil drilling activity has declined
substantially especially in Canada. As per PSAC (Petroleum Services Association of Canada), number of
oil wells drilled in 2015 would be around 7,650, a drop of 32% from 2014. There is lot of uncertainty
around how oil prices and oil drilling activity are going to behave in coming years. Given these facts, I
believe the revenue assumptions and valuation multiples at which the security is presented to be bought
at (more in detail in next points) are preposterous and overly optimistic.
Security trading at extremely high multiples Questor Technology is trading at extremely high
multiples. As a value investor I wont be comfortable paying for a micro-cap firm which is trading at
5.1x of TBV (tangible book value), 3.16x of NTM revenues, and 6.0x of NTM EBIDTA, unless
company has strong sustainable moat with healthy free cash flows. Both the things does not hold true in
case of Questor Technology. FCF is negative for last twelve months and around 11c per share for FY13,
making a weak case for buying this company. Refer Appendix 1.
Sales assumptions As mentioned in my first point, team has applied overly optimistic sales
assumptions and that too for long period (10 years) to calculate intrinsic value. Sales growth of 20% yoy
for next 5 years and then further 10% yoy growth for another 5 years are on higher side given the
industry is facing sectorial headwinds and which may last longer than expected. Since Questor is a
micro-cap, I believe making sales forecast of no more than 3-5 years is justifiable. Despite of using
above assumptions margin of safety is 42%, which is not very lucrative to make a buy recommendation.
Refer Appendix 2.
Unsustainable moat On one side team mentioned that Questors superior technology separates itself
from its competitors while on the other hand team also mentioned that this firm is operating in a highly
competitive industry. These two statements in itself are contradictory. I see no reason that other
competitors cant build similar technology.
Valuation As I mentioned in my earlier point valuation of a micro-cap based on 10 year forecast would
be highly unpredictable. Consistent increase in revenue and EBITDA margins for 10 years is definitely a

stretch. If I were an investor, I would pay for the firm based on the balance sheet numbers 2x BV i.e.
around $1.13 per share or by applying conservative forward P/E multiple of 10x on $0.28 EPS i.e. $1.1
per share.

APPENDIX 1: Trading multiples

APPENDIX 2: SALES PROJECTION BY TORONTO BULLS

GRADE: __