Preamble
Before starting, I must warn you that I am biased regarding Torotrak. I have held shares in the company continuously since November 2000. That is, apart from 2 days when I sold them all, only to get twitchy and buy back in. Is that falling in love with a share?

I am a member of the Torotrak Private Shareholders Association (TPSA), and currently hold the office of TPSA Chair. The TPSA consists of over 500 private shareholders, and collectively we hold some 25 million shares, which is 15% of the issued share capital.

Most unfortunately, Richard Shaw, one of the TPSA founders and TPSA General Secretary passed away suddenly last November.

As a representative of the TPSA, I have attended a number of City Presentations given by Dick Elsy (CEO) and Jeremy Deering (FD) of Torotrak held in London. These meetings are primarily aimed at Institutional investors, and the likes of djpreston and his colleagues have attended.

By convincing management that Private Investors held the vast majority of the shares, Torotrak conceded that the TPSA could attend these presentations. Was it also a coincidence that this changed happened around the time that Torotrak were running short of cash so needed shareholder support to fund a rights issue? Hmmm...


The numbers:-
Share Price : 21p
Shares in Issue : 161 Million
Market Cap : £34 Million
Cash in bank : £10 Million
Enterprise Value : £24 Million
Broker price target : 40p share


What does Torotrak do?
It develops and licences Continuously Variable Transmissions. At this point most people say "like the DAF rubber band system?". Well, yes in function but no in method. A CVT is the Holy Grail of transmission systems, the best of everything. Getting it to work is a different matter! With a gizmo that fits on the end, Torotrak's CVT can be configured as an Infinitely Variable Transmission or IVT. This provides continuously variable gear ratios right from Reverse, through Neutral, to full Forward ratio. Without a clutch or losing drive the whole time.

To see how it works, have a look at the Torotrak Website:- http://www.torotrak.com/content/9/technology.aspx

CVT:- http://www.torotrak.com/content/434/torotraks-variator-cvt.a...
IVT:- http://www.torotrak.com/content/183/torotraks-variator-ivt.a...


Technology History
The history of Torotrak's core technology goes back a long way:-
1) You can find references to "Perbury" going as far back as 1960 - there is a diagram dated 1972 which looks just the same as it does today.
2) During the 1970s CVTs were used in the Harrier Jump Jet.
3) There is a video of a fresh-faced David Coulthard testing a CVT equipped F1 car in 1993. Before they were swiftly banned - probably for sounding horrible!
4) Torotrak has spent its way through £75 million developing the systems to the current state.
5) I understand that Shell has spent around £100 million developing the traction fluid to be used in traction drives.


Company History
The company was floated from BTG in 1998 raising £50 Million. During the early days, the hope was to get the transmission in to cars, and in particular into American SUVs. This was quite reasonable at the time as SUVs were heavy and inefficient, which suited the IVT at the time, which was heavy and underdeveloped.

However, it never happened. Ford and GM decided not to proceed with the technology, and Toyota cancelled their licence causing a collapse in the share price.

Reality set in, a change of Management was in order along with a reduced workforce and a change of company direction.

Since then the new management diversified into many different areas, including Lawn Tractors, Farm Tractors, Fork Lifts, Trucks, Buses, KERS, and Auxiliary drives.

In that time they have forged agreements and alliances with MTD, Tata, Allison Transmissions, an as-yet unnamed European Truck and Bus Manufacturer (ETBM) (could be Volvo | MAN | Scania | another), Jaguar, Ricardo, Flybrid, Carraro S.p.A, Williams Hybrid Power Ltd, SKF, Ford, Prodrive, Iseki, JTEKT, Optare, Shell, Xtrac and Rotrex.

In 2007 Torotrak (via Flybrid) started to develop a KERS system for a major Formula1 team. The system was quite well developed, but it turns out that the team was Honda, who decided to pull out of F1 completely just before the 2009 season. The car went on to run as Brawn GP, but the Honda engine had to be replaced at the last minute with a Mercedes-Benz unit. This meant that the KERS system was not compatible and was never used. However, it resulted in the first ever Royalty payment to Torotrak being from F1, and F1 generated enormous interest in KERS systems.

One problem with the Flybrid/TRK KERS system was that it was "too efficient". In other words it was so good at harvesting energy, it meant that the KERS was fully charged before a braking manoeuvre was complete. Flybrid went on to develop their own CFT or "slipping clutch" system in part to address this issue. However, for KERS in cars or commercial vehicles, the most efficient system is the one you want.

Compared to a Battery / Electric KERS system, an all-mechanical system using a CVT is ONE THIRD of the cost per gram of CO2 / Km, HALF the weight, HALF the size, and TWICE the efficiency.


In May 2010 Torotrak set up a Joint Venture with Danish company Rotrex called "Rotrak". Rotrex specialise in superchargers for performance cars, including Koenigsegg and the like. However, superchargers are also useful for engine downsizing, where a smaller engine plus a supercharger can provide the same amount of power but more efficiently and with less CO2. Rotrex's superchargers work using similar traction technology as Torotrak, so makes a good fit. A major problem with downsizing is that at low engine revs, the smaller engine is unable to provide the power required, and at high revs, the supercharger provides more boost than is required. By using Torotrak's variable drive, at low revs the system can be set up to provide significant overdrive, and at high revs to provide underdrive.


Finally, Torotrak are taking part in a number of collaborative projects being funded by the Technology Strategy Board (TSB):-
1) Mechanical Hybrid for Premium cars led by Jaguar.
2) "KinerStor" low-cost flywheel hybrid led by Ricardo.
3) "Flybus" KERS research programme for buses and trucks led by Torotrak.



The Present

The Printed Annual Report for Financial Year 2010 was most notable for a re-vamp of the report presentation, concentrating on Efficiency and CO2 reduction rather than the technology. This re-branding was extended to an overhauled website:- http://www.torotrak.com .

The last results were the interims for the half-year to 30 Sept. 2010 released November 2010 :-
http://www.torotrak.com/pdfs/rns/2010/Half-year-results_fina...

At the same time Torotrak engaged a new House Broker, Charles Stanley Securities (CS), who have produced an initial Broker Note with a fantastic amount of detail. The combination of re-branding and the appointment of CS meant that an unprecedented 4 days of City Briefings were undertaken last November, double the usual.

The feedback that we got at the TPSA presentation was that many more Greentech Investors were interested in Torotrak, but would probably wait until the outcome of the Allison decision was known.

Torotrak have changed from a "one-trick pony" to a company offering 3 distinct solutions for Energy Efficiency and CO2 reduction. Each of the solutions can make savings around the 20% mark, and the interesting thing is that each system saves energy in completely different ways. One important feature of the KERS and Engine Downsizing solutions is that they both involve significantly less risk to manufacturers than a main-drive transmission.



The Future
Although the word was that new investors would be unlikely to invest until the Allison decision is known, I have a sneaking suspicion that someone is already building a stake. Since the start of December there have been a number of unusual trades, as if someone is slowly hoovering up all the sales with strict instructions not to raise the share price. Most of these trades (which I assume are purchases) have taken place at 22p, the cumulative total is 1.4 Million shares, which is just under 1% of the shares in issue. When the Infinitrak news was released, these transactions stopped, but started again last Friday. This seems to be supporting the share price at the current level.

The first news we had in 2011 was that agreement has been finalised with MTD on the re-structuring of the Infinitrak Joint Venture. This concluded with a payment of 1 Million Pounds from MTD to Torotrak, which has already been received. It was not made clear whether this was a penalty payment, a royalty payment, or a licence payment. I suspect that this figure was already included in the CS Broker forecast for FY 2011 ending 31 March 2011.

The first big opportunity for a re-rating is the decision Allison has to make in Spring 2011. There are 3 official choices:-

1) No exercise of further rights.
2) Extend rights for 2 further Years. £3.5M + £3.25M
3) Perpetual plus extended licence. £14M

Management are indicating that they expect Option (2) to be taken.

Option (1) would no doubt hit the share price.
Option (3) would probably double the share price from the current level within minutes. It is almost 9p per share in cash for a start!

By the sounds of it, Allison is really in need of a new Automatic transmission that would improve their product range in the USA and allow them to sell into Europe. Allison have already committed a significant amount of money to Torotrak, and are the biggest shareholder, currently owning over 9% of the stock.

The decision is "expected in March 2011", but if it is delayed by a few weeks it will miss the end of this Financial Year, which ends 31 March 2011. If so, the decision will be known by the time that Annual Report and AGM come round. Looking at the CS Broker Note, I get the impression that CS are not expecting any Allison licence fees to fall into the current Financial Year.

The obvious question at this point is what about Option (4) - why would Allison pay £14M when the rest of the company they don't already own is valued at approx. £22M (allowing for cash pile)?

Allison is owned in part by Carlyle group who specialise in company buyouts, so anything is possible.

The best defence against a buyout is that some 70% of the company is still held by private investors who hold on to their shares like leeches.

I reckon that an attempted buyout would triple the share price from the current level within minutes. I have no doubt that Carlyle could succeed, but it won't be at the standard 30% premium to the existing share price!


Allison is the major possible trigger for a share price re-rating in 2011.

Others are:-
Production decision by ETBM.
News of production programme by Carraro.
Launch of an IVT equipped tractor from Iseki.
Results of Jaguar trial published
Results of Flybus project published
Results of KinerStor project published
Results of Rotrak prototype published
Tie-up with Tier-1 manufacturer for Supercharger development
New agreements / licences we don't know about


And the other big unknown is TATA. In 2006 Torotrak developed a prototype CVT transmission for Tata, with the intention of getting it into the Tata small car project (now known as the Nano). In 2007 Torotrak signed a licence deal with Tata for four fields of application. We were subsequently told that Tata had selected the first field to be developed, but were not told which it was. After this, Tata imposed a very strict news blackout on Torotrak. All the indications are that CV-Tech of Canada have got the Nano project, but it has been a long painful process for them. You just don't know until it is announced.


Hope PoleVision Racing are intending to run a flywheel hybrid at the Le Mans 24 Hours on 11th/12th June. Although this does NOT contain Torotrak technology, it does use a flywheel as in the Jaguar system, and should generate some publicity. The complete system is supplied by Flybrid, who are partner to Torotrak on the Jaguar.




References

Torotrak Website:- http://www.torotrak.com/

Company History:- http://www.torotrak.com/content/168/history.aspx

DC CVT Video:- http://www.youtube.com/watch?v=6A9V2O5D8mc&feature=playe...!

Jon Hilton Lecture on KERS:- http://scpro.streamuk.com/uk/player/Default.aspx?wid=9444&am...

Carraro VaryT Video:- http://www.youtube.com/watch?v=iDX5q-Kdw_0

Results Presentation:- http://tinyurl.com/24k7d4y

CS Broker Note:- http://www.mediafire.com/?g09djdl88cb39je

Carlyle Group:- http://www.carlyle.com/Company/item1676.html

Rotrex:- http://www.rotrex.com/Home.aspx

CVTech:- http://www.cvtech-ibc.com

Hope Polevision:- http://www.polevisionracing.com/flista/index.php?lang=en



And finally...
On a lighter note, as a Torotrak shareholder you will find yourself shouting at the television:-

"YOU NEED A CVT" as you watch Jeremy Clarkson failing to get round the Nürburgring in a Jaguar in under 10 minutes!

"YOU NEED AN IVT" as you watch Ice Road Truckers miss a gear change and slip back down the slope!

"GET A KERS SYSTEM" as you watch Jensen Button overtaken by a Ferrari!


Regards
Mick