|
Recommendations: 47
Executive Summary
Share Price - 161p
Shares in Issue - 24.9 million
Market Capitalisation - £ 40 million
Cash - £ 7.6 million
Debt - None
Dividend (maiden) 0.65p
Introduction
Dear Fools, Investment wise it has been a bit of a traumatic year for me. Due to the number of dusters encountered, I am starting to realise the Oil and Gas sector might not be the best place for my health and wealth. This year, I decided to broaden my horizons and focus more on small caps primed for growth. One of the companies I am invested in is Tracsis. I like Tracsis because it focuses in part on monitoring and systems management and this is something I understand. Also, it seems to me that Tracsis are uniquely placed as being the only provider of the products and services they provide and are set for some pretty exciting growth. This is my write up.
Before we begin
The companies that are responsible for running the trains in Britain are called Train Operating companies (TOC's). These companies like Virgin Rail, First CapitalConnect and FirstGroup, are privately run companies. The responsibility for managing the infrastructure that the trains run on ( the tracks, the stations/buildings and the signalling), is the responsibility of Network Rail (a state regulated not for dividend company).
What do Tracsis do?
Tracsis provide services in the form of software, consultancy and hardware to the rail industry.
Their services can be split into 3 main revenue streams:-
Software
Tracsis supply software (TrainTRACS) to 14 of the 20 TOC's to optimise crew and driver scheduling. Although this doesn't sound a complex process, this software can save the TOC's up to 12% on direct costs compared to traditional methods (doing it by hand). The revenue from this software is constant (annual fee paid each year by the TOC's) so this provides a stable source of revenue to Tracsis. Although this product is the foundation of Tracsis, they also supply other software products (a performance and safety management tool called Compass and a rolling stock tool for vehicule planning called TRACS-RS). These software modules should be interesting to existing customers of TrainTRACS.
Consultancy
Tracsis provide a consultancy service to the TOC's which focuses on performance modelling e.g. what happens when there is a change to the rail infrastructure. Obviously there is strong overlap between the software and consultancy streams.
Both the software and consultancy streams made up about half of the Tracsis total revenue stream for 2012.
Hardware
In 2011 Tracsis bought MPEC. MPEC provides condition monitoring and data logging equipment that includes embedded software for the management and maintenance of infrastructure.
Basically it is a hardware device that provides proactive monitoring of key components on the train tracks. Instead of fixing the rail infrastructure after it fails, MPEC detects problems (signal failures or even worse problems that can cause train derailment) before it affects train users. Catching these problems early reduces maintenance overhead costs (fewer people needed to manually check the key infrastructure components) and by reducing delays it means Network Rail have to pay fewer penalties in the form of fines (they are fined every time an infrastructure component causes a train delay). These devices are applied to key points on the track and the data is sent back to Network Rail's systems management system to monitor the track and generate reports about potential failures.
As we shall see in the next section, the acquisition of MPEC has caused a lot of excitement in terms of what it has done to the bottom line.
Historical numbers
From Stockopedia:-
2010 2011 2012
Revenue £m 2.65 4.08 8.67
Operating Profit £m 0.58 1.10 2.95
EPS p 2.30 4.48 9.83
EPS Growth % - 86.2 121
Operating Margin % 21.6 26.9 34.1
These figures give a background to the growth Tracsis has experienced over the past few years. In 2011, the acquisition of MPEC added £1.1 million revenue (deal completed late in the financial year) and £4.5 million revenue in 2012. However, what is interesting to note is the increase of the operating margin as sales in MPEC have increased. If you take the operating margin for 2010 of 21% (before the MPEC acquisition), apply it to the 2011 and 2012 revenue figures (minus the MPEC revenue), you can work out the operating margin for the MPEC devices which I make out to be 41% for 2011 and 45% for 2012. It is only a rough guide but it is quite important to work this out for the valuation.
MPEC
MPEC has turned out to be quite an acquisition. Tracsis paid 3.4 million for MPEC in 2011 and by my reckoning, it is well on the way to repaying that price in just over a year. It now accounts for over half the 2012 revenues for Tracsis. However, unlike the software and consultancy revenue streams, MPEC is not a source of repeat revenue. So we need to work out how many MPEC devices have been sold to Network Rail and how many are still needed. Currently 4,500 devices have already been supplied (figure supplied by scsw reference below). I think it mentions how many they need on the Network Rail website:-
We seek innovative ways to deliver asset condition measurements from remote sites at low cost.
In particular we want to reduce the cost of monitoring track circuits and signalling local bus bar earth leakage to a point where a large scale rollout of around 40,000 units becomes viable.
http://www.networkrail.co.uk/innovation/measuring-monitoring...
If that is the case, Tracsis has supplied just over a tenth of the devices Network Rail needs and there is lots of room for growth. It is not clear when Network Rail will execute this work to implement the rest of the devices, but if it is more efficient and saving money, I'm guessing they will want the rest of the devices implemented asap. If that is the case Tracsis will be game on for this years competition. I must state at this point that this is not what the company think will happen, (see valuation section). However with its high margins and Tracsis reputation for under promising and over delivery, I wouldn't be surprised if MPEC sales exceed expectations.
Valuation and growth prospects
The company has a current P/E ratio of 16. Looking forward, the company state:-
The Directors are confident of achieving further growth in the future, and our underlying organic growth should remain on a consistent trajectory given the robust nature of the UK rail industry.
http://www.investegate.co.uk/tracsis-plc-%28trcs%29/rns/fina...
As organic growth was 39% last year, my expectation is that earnings per share for next year will be 13.6 pence giving an undemanding forward P/E ratio of just under 12.
However, Tracsis have a track record of growth through acquisition. They have made 4 acquisitions in their 5 year public history and are currently appraising companies. With 7 million in the bank any kind of prediction for future revenue becomes difficult. However the future P/E ratio excluding acquisitions gives a nice baseline to work off.
Overseas activity accounted for only 3% of Tracsis revenues last year. There has been a recent contract win in New Zealand for their Compass software, but what excites me is the following statement in the final results RNS:-
MPEC was also successful in winning a technology pilot in Scandinavia where condition monitoring devices are being tested on rolling stock vehicles. Should this pilot prove successful there is a strong possibility of Tracsis entering this new market where it is already well placed to exploit given its credentials and working relationships with the majority of UK train operating companies.
If MPEC can gain traction overseas (excuse the pun), there is potential for exponential growth. In my opinion, this shouldn't be too difficult to replicate. Rail infrastructure should be pretty much the same regardless of the country. In any case, I will be watching out for an RNS regarding the result of the Scandinavian pilot.
It is not clear in any of the company documentation what they expect overseas penetration to be this year. In my opinion, any overseas growth has not been factored into 2013 forecasts. It is difficult to predict but I'm in this for the long run and think the overseas prospects are good over a 3 year timeframe.
The other growth area that is very interesting are the products that have not yet been developed. Just by looking on the Network Rail website, it is clear there is unmet demand for other products similar to MPEC to monitor the rail infrastructure:- http://www.networkrail.co.uk/innovation/measuring-monitoring...
This is another potential longer term revenue stream for Tracsis.
With a company expecting to grow at 39% next year, excluding any acquisitions (which it has done at the rate of almost one a year), overseas activity (my conclusion) and internal product development, there are multiple opportunities for revenue upgrades for 2013.
Management
Consistently under promise and over deliver. Reading through the RNS's, they have consistently exceeded expectations and that fills me with confidence. The thing that really impresses me is their philosophy to acquisitions. They have made it very clear on what they are looking for and how they would value an acquisition. They have dedicated a whole section of their website to it. http://www.tracsis.com/acquisitions.htm
They have an almost Buffett-esque attitude to extracting value and I would be very surprised if they ever get caught up in “deal heat”. Indeed judging by the MPEC acquisition in particular, they seem to be able to buy businesses at very attractive prices. MPEC would have been cheap at twice the price in my opinion.
SWOT Analysis
Strengths
- Quality management (under promise, over deliver)
- Strong growth prospects (organic and through acquisition). All 3 revenue streams showing significant growth
- No debt and cash to make acquisitions
- Good growth track record
- No apparent competitors and strong barriers to entry
Weakness
- MPEC revenues dependent on one single customer
- No visibility for the MPEC orders
Opportunities
- Overseas growth
- Selling new software modules to existing TrainTRACS customers
- Acquisitions
- Internal product development to address outstanding needs of Network Rail
Threats
- Decrease in MPEC revenues could have significant impact on companies profit levels (MPEC has considerably higher profit margins than other revenue streams)
Conclusion
There's lots to like about Tracsis and it is why I am invested. I think there are enough potential growth streams over the next 3 years to make it a good investment. I'm not sure it will win this years competition but you never know. The key RNS's I will be looking out for are the results of the Scandinavian pilot, any further information about MPEC sales to Network rail and acquisition news.
The only concern is that if MPEC sales soften, that can impact the bottom line quite significantly. However, the outlook is quite positive so we will have to wait and see.
I guess the investment case comes down, in part, in the ability of management to deliver growth via acquisition. They have done a good job so far. In any case predicted growth of 39% for next year, excluding acquisitions, looks good to me.
I will be keeping this thread active throughout the year with any relevant RNS's. Any comments welcome.
Disclaimer
I hold
References
http://www.mpec.co.uk/downloads/sa380tx_datasheet.pdf ( more detail on MPEC devices)
http://www.intellectuk.org/media-centre/member-press-release... ( mentions of Tracsis)
http://www.parkwalkadvisors.com/pw_newsletter_2011_jun_web.h...
http://www.networkrail.co.uk/WorkArea/DownloadAsset.aspx?id=... ( more on Network rail)
http://www.networkrail.co.uk/WorkArea/DownloadAsset.aspx?id=... ( more on Network rail)
http://www.networkrail.co.uk/innovation/measuring-monitoring... ( to find out what is needed by Network rail in terms of systems management )
http://londonist.com/2006/06/signal_failures.php ( what a signal failure is)
http://www.nationalrail.co.uk/service_disruptions/why/signal... ( what a signal failure is)
http://boards.fool.co.uk/tracsis-trcs-write-up-12668097.aspx... ( good write-up)
http://www.scsw.co.uk/article.php?id=4760 (This is a subscription site, but recommended reading as Tracsis is covered in detail here)
http://uk.advfn.com/cmn/fbb/thread.php3?id=16174567 (quiet but good thread)
http://www.advancedrailtech.com/railway-signalling-data-logg... ( old webpage, some useful information)
http://www.tracsis.com/downloads/rwa_brochure.pdf (more details on consulting services)
http://www.investegate.co.uk/tracsis-plc-%28trcs%29/rns/fina... (final results)
http://en.wikipedia.org/wiki/Rail_transport_in_Great_Britain... (Background on Network Rail and how TOC's were formed)
http://www.ft.com/cms/s/0/06128f22-0963-11e1-a2bb-00144feabd... (Tracsis in the FT)
Regards
Stuart
|
Recommendations: 0
Super post.
I hold, but now with reinforced confidence :)
Many thanks
Jon
|
Recommendations: 3
Hi Stuart,
Wow, what a tour de force! Very impressive post.
Anyone who wants to meet the management of Tracsis can do so at a free event being organised by Equity Development in London, on 17 Jan 2013.
I'll be going, as the other 2 companies presenting (Regenersis and VP) are both good too.
Details are here;
Due to anticipated interest and limited space availability, interested attendees are encouraged to register (below) as soon as possible
Venue: Fasken Martineau, 17 Hanover Square, London, W1S 1HU
Time: 5.00pm for 5.30pm start, 30 mins for each company to present and answer questions, and drinks and canapés to follow at 7.00pm.
To request a place contact: Hannah@equitydevelopment.co.uk
Hope to see some of you there.
Cheers, Paul.
|
Recommendations: 1
Recommendations: 3
Just been doing some further reading up and stumbled across 'The McNulty Report'.
It recommends ways in which the whole rail industry can work towards delivering a safe and efficient railway which represents value-for-money for customers and taxpayers (It was delivered in May 2011).
A summary can be found here:-
http://www.networkrail.co.uk/aspx/12658.aspx
The full report can be found here:-
http://www.rail-reg.gov.uk/upload/pdf/rail-vfm-summary-repor...
It gives some really good background into the current inefficiencies in the rail industry.
Chapter 6 highlights two recommendations that are services provided by Tracsis:-
6.9.5 Information technology in planning and allocating work
The Study recommends the rapid implementation of planning and work allocation technology across the industry to enable the more efficient deployment of people.
6.9.6 Network Rail operations and maintenance
Network Rail is implementing a new operating strategy that deploys modern signalling and control technology. It could accelerate investment and incorporate a greater part of the existing signalling into new operating centres than currently planned, but will need to balance the availability of capital with the staff and cost savings. The company intends to extend its programme of modernisation of maintenance by deploying high-output machinery, automating track inspection and using components that require less maintenance. Each of these initiatives should reduce staff costs.
Not really new news but I had not seen the report before so I thought I'd post.
Regards
Stuart
|
Recommendations: 1
Trading statement out today:-
http://www.investegate.co.uk/tracsis-plc/rns/trading-update/...
Nothing that much to get excited about. More a steady as she goes statement:-
Group trading in the six month period has been buoyant, with revenue expected to be in excess of £4m (H1 2012: £3.7m). It is expected that both Adjusted EBITDA and Profit Before Tax will both be ahead of the same period last year and, accordingly, trading is in line with expectations
They are trading in line with expectations, meaning that they still expect 40% organic growth this year.
Cash balance looks good with $8.5 million in the kitty.
The Group looks forward to the outcome of the Brown review which will determine how and when rail franchising activity returns to normal
The outcome of the Brown review is expected by the end of Ferburary. This has apparently caused a lot of issues because a lot of the TOC's franchises are up this year and they do not want to invest any money until they know their franchises are being extended.
It hasn't affected the group that much by the looks of things.
No mention of the outcome of the Scandanavian MPEC pilot or any news on aquisitions. Any news here would have been a bonus. Patience required me thinks.
Still happy to hold.
Regards
Stuart
|
Recommendations: 8
Interims out :-
http://www.investegate.co.uk/tracsis-plc-(trcs)/rns/interim-...
Highlights:-
- Revenues increased 29% to £4.7m (H1 2012: £3.7m)
- Adjusted EBITDA increased 49% to £1.9m (H1 2012: £1.3m)
- Profit before tax increased 50% to £1.7m (H1 2012: £1.1m)
- Cash balances up by £0.9m to £8.5m (H1 2012: £6.0m, FY 2012 £7.6m)
- Interim dividend proposed of 0.3p per share (H1 2012: 0.2p per share)
A solid set of results. Especially because Tracsis's figures always seem to be geared towards the second half of the year. They are certainly heading in the right direction. It looks like they are well set reach their target of 13.6 pence EPS.
It would have been nice to hear something on the Scandinavian MPEC pilot. Also, the overseas growth has been limited to new software sales. Software only makes up about 15% of the revenue stream and the new contract in New Zealand is worth about 150K a year, so while positive, not significant (however, any software sales are re-occurring revenue and will positively impact consultancy services so worth bearing in mind). They mention that the refranchising process for the TOC's has had a limited impact on their business so that is positive.
The following sentence from the interims really caught my eye:-
Market indicators suggest that condition monitoring and the concept of 'intelligent infrastructure' are very much here to stay and, with the Group's momentum in the field, we continue to explore additional sales leads and opportunities both in the UK and overseas.
I take that to mean they :-
1. are very bullish of future MPEC growth opportunities
2. see opportunities to acquire products that complement MPEC.
To me this is where the real growth story is, with the software and consultancy streams providing support for the company in the form of re-occurring revenue streams. I would like to see them add complementary products to enhance their 'intelligent infrastructure' product suite. In my opinion, this will be where TRCS will achieve significant growth especially if they can replicate the operating margins they have for MPEC.
Positives
- Tone of the RNS is very positive The opportunity for further significant growth both in the UK and abroad is evident, and Tracsis continues to be well placed to capitalise on these prospects.
- Healthy MPEC sales ( £2.6 million ). By my calculations they have only supplied 15% of the 40,000 units needed by Network rail (see analysis in my original post). Still plenty of room for growth.
- Contract wins on the software side. As mentioned in the RNS, this has a positive knock-on effect for the consultancy stream.
- They have launched a new software offering for the rail freight sector which has been sold to a freight customer marking an entry into a new market. Not much detail into the financial impact of this contract win, but it could potentially open up a new market for the companies software.
Negatives
- No mention of MPEC trail in Scandinavia. IMO, The potential for significant growth is based on the ability to replicate MPEC sales overseas. Patience needed here, but it would have been good to get at least an update.
- No acquisitions for over a year. They mention:- The Group continues to review multiple acquisition opportunities and prospects but they have said that in all trading statements so far. Again, patience will be needed here.
- Contract wins have been on the software side which is a relatively small percentage of their revenue stream.
Conclusion
I feel relaxed with this investment. Even without the news I am interested in (outcome of Scandinavian MPEC pilot and acquisition news) they look set to deliver this year. If the forecast prediction of 13.6 pence EPS is delivered, at the current share price of 175 pence, that gives a forward PE ratio of about 13, so relatively undemanding. I am happy to view this investment on a 3 year time frame. I am sure we will have some news, I am just not sure when. In the meantime organic growth is ticking along nicely.
As always comments welcome.
Regards
Stuart
|
Recommendations: 1
Acquisition news out today:-
http://www.investegate.co.uk/tracsis-plc--trcs-/rns/rule-2-7...
The boards of Sky High and Tracsis have today agreed the terms of a recommended cash offer to be made by Tracsis for the entire issued ordinary share capital of Sky High, excluding the Management Roll Over Shares and the Prowse Trust Shares (as defined below), at 15.25p per Sky High Share (the "Offer").
The Offer values Sky High's entire issued ordinary share capital (including the Management Roll Over Shares and the Prowse Trust Shares) at approximately £3.28 million and an Offer Document has today been dispatched to all Sky High shareholders (the "Offer Document"), setting out the terms and conditions of the Offer.
It is interesting that they have gone down this route. I was hoping for the aquisition of a company that provides similar sort of systems management tooling to MPEC so not the aquisition news I was hoping for but looks like it could be a good fit.
What do Sky High do ?
From the annual results:-
Sky High Plc is an international data capture and analysis company specialising in the management and delivery of time-critical data projects.
Our primary markets are the transport and people movement sectors throughout the UK, Ireland and Australia with projects also increasingly undertaken in other international markets. Our aim is to increase shareholder value by the continued profitable development of our business through a combination of organic growth and acquisitions related to our core data capture, project management and transport data skills.
http://www.skyhighplc.co.uk/pdf/31.08.12_SKY_ar12.pdf
Briefly looking through the annual report they have a turn-over of just over £5 million and a profit of just £80 K. Not that much to get excited about as a stand-alone acquisition. However, the expect a strong year this year and more importantly there may be some synergies between Tracsis consultancy business Sky High's. Also they have a presence in Australia where Tracisis have also done some work so there will be opportunities to penetrate overseas markets.
Worth noting they paid about £3.3 million for the company so they still have about £5 million cash left for further acquisitions.
We will have to wait and see how this plays out. If there is real synergy between the two businesses, this could be a very interesting, but at the moment I don't see it as being as exciting as when they bought MPEC.
As always comments welcome.
Regards
Stuart
|
Recommendations: 0
Hi Stuart,
Worth noting they paid about £3.3 million for the company so they still have about £5 million cash left for further acquisitions.
Note that they paid for the acquisition in shares, so no effect on the cash pile.
TRCS has been on my watchlist for a couple of months, looks like a solid company with a virtual monopoly in a niche market, and a great acquisition strategy. It's never moved into my buying range, which is a pity...
Cheers
Remi
|
Recommendations: 0
Sorry - my mistake - misread the headline on the announcement - it is indeed a cash offer...
Remi
|
|
|
