Trakm8 accelerating away?

Regular readers may remember that I have written two articles about a small company called Trakm8. I bought shares in Trakm8 in mid-2011 and have waited patiently for developments:-

http://michae1mouse.blogspot.co.uk/2011/09/your-m8-my-m8-trackm8.html

http://michae1mouse.blogspot.co.uk/2012/10/trakm8-revving-up.html

Trakm8 issued a trading statement on Thursday which appears to confirm my faith in this company in both its short and long term prospects.

In their interim report in November, the company announced that the company had "decided to embark on a period of significant expansion".

They justified this as follows:-

"The past few years have seen a major transition for the business; we have built a strong core of customers whilst growing service recurring revenues, based on a market leading portfolio of telematics products and solutions. This in turn has led to a turnaround in financial performance, with strong profitability following a period of trading losses, and a strong balance sheet with substantial cash resources available."

They went on to say:-

"This fundamental improvement in the Group's position has provided the Board with the confidence and scope to consider a range of strategic options. At the same time the tough economic climate means that our strong financial position and business model gives us a competitive advantage compared to weaker competitors"

However, expansion involved increasing the headcount by 15 new employees with an estimated increase in overheads of £400,000 per annum.

Whilst excited by their future prospects, I did anticipate that for the year ended 31 March 2013, Trakm8 might record a small loss associated with the costs of building the team further.

The trading statement released this week is far better than I could have anticipated, and now confirms my belief that this company has multi-bagger potential in the short and long term.

Although revenues for the full year to March will be slightly lower than last year (£5.2m), the company has in fact remained profitable, despite the increased overhead. Margins have further improved (75% last year) and recurring revenues have also increased. Significantly, despite a slight dip in revenues and increased overhead, cash balances have improved again to £1.4m. (£1m last year, £1.1m at the half year).

Some major contracts due to start this year have fallen into next year, and as testament to their products, they have secured an agreement with a competitor (Visilink) whereby :-

"Trakm8 is delighted to offer Visilink customers the opportunity to transfer to Trakm8's solutions, allowing us to broaden our footprint in the UK. We will do everything possible to ensure a smooth transition and a productive future cooperation with customers that transition."

John Watkins the CEO goes on to say:-

"Having established a strong financial base we are embarking on a period of significant expansion. The Board is confident that this investment strategy will deliver increased revenues and shareholder value in the near term."

Clearly they are currently delivering on their promises and more.

Directors have a lot of 'skin in the game' and appear very confident, I continue to share their confidence.

When the results are released, the shares will look expensive on a p/e basis. This will be very misleading. All eyes should be on next year and subsequent years.

Just to illustrate, as the additional employees begin to make an impact and increase revenues, the impact on the bottom line will be game changing. Despite the shares having risen a healthy 31% since the trading statement, the market cap. is still just £4.4m.

I expect revenues to March 2013 to be around the £5m mark given the interim figure, but let's consider next year. If they can achieve somewhere near the £6m mark then with healthy margins of around (let's say) 78% and increased overheads taking admin expenses to £3.7m, that would give a profit of around £1m or EPS of 5.3p. Applying a modest p/e ratio of 12 gives a share price of 63p.

Over forthcoming years if they can increase revenues towards £10m then EPS leaps to a massive 22p. Again applying a modest p/e of 12 gives a share price of £2.64. In other words, any revenue increase of £6m upwards has a substantial impact on the bottom line. This is a company with market leading products which is profitable, generating cash and has a very high percentage of recurring revenues. The balance sheet is very strong and improving rapidly.

As I have mentioned before, the shares are illiquid, but as the market cap. improves so will liquidity.

This remains a long term hold for me, and whilst I always remain cautious, I am a excited for the future.

As ever, no advice is intended or given, and the blog is purely an account of my investing thoughts and experiences.

Where next for Quantum dots?

I find watching the progress of some companies and their share prices mesmerising even when I not actually invested. One such company that currently has me transfixed is Nanoco.

Nanoco is currently valued at around £350m. From their blurb on the website :-

"Nanoco partners major R&D and blue-chip industrial organisations in the development of applications incorporating semiconductor nanoparticles, “quantum dots”."

and apparently:-

"Nanoco Technologies is the only manufacturer presently able to supply production quantities of quantum dots which do not use a regulated heavy metal."

which, from what little snippets of information that I have read, appears to open up a huge market for them. In fact they have recently signed a deal with Dow Chemical and from the interims :-

"Our worldwide licensing agreement with The Dow Chemical Company is transformational for Nanoco. It represents a major endorsement of Nanoco's technology, scalability and market potential."

This all sounds very sexy, and of course Nanoco could become massive, perhaps even a multi-billion dollar company.

Will I be buying shares then? Well certainly not at this valuation.

Firstly, I like to have at least a decent grasp of a company's business before I invest, and I have to be honest and admit that semiconductor nanoparticles are not really something within the realm of my understanding. Perhaps I'll regret not carrying out the necessary research?

However, the main reason to stop me buying is the current valuation based on their interim report.

With a market cap. of around £350m, if we gave Nanoco a p/e of say 25 for a growth company then that would imply an operating profit of £14m.

Currently, revenues for the sixth month period (end Jan 13) are approx £2.5m with an operating loss of £1.2m. Net assets come in at £16.3m. Cash and cash equivalents are around £12.5m down from around £15.5m six months ago. Full commercial production with Dow Chemical is anticipated in 2014.

For me, it would take a massive leap of faith to invest in this company, but clearly traders have been pouring in. Good luck to them and I hope it lives up to expectations, but there is no margin of safety that I can see and let's hope that those buying now are not just being suckered by the 'greater fool' method of trading.

An intelligent choice?

Over the past year I have been buying shares in a company called Access Intelligence for prices between 3p-3.75p. This is a micro-cap company which describes itself as a "leading supplier of Software-as-a-Service (SaaS) solutions for the full life cycle management of a company's governance, risk and compliance."

As with all of my share selections, I'm looking at a medium to long term investment and felt that this micro-cap has significant potential.  The company has a market cap. of just £9.1m, and the results which were released on March 5th 2013 show that the company produced revenues of just over £8m, and a small loss of £114,000.

On the face of it the results don't look particularly impressive until you dig deeper.

Firstly this is a company that is currently investing heavily in it's future to increase long term shareholder value, and initial indications are that this investment is paying off.

Whilst turnover was up 11% from 2011, most significantly, contracted not yet invoiced revenue was up 101% to GBP5,453,000 (2011: GBP2,713,000) and recurring revenue was up 16% to GBP5,562,000 (2011: GBP4,807,000) at 69% of sales (2011:  66%). Gross margins are a very healthy 70%.

The company also boasts a solid balance sheet with £2.8m cash and very little debt. In fact a small dividend will be paid to shareholders during this month (approx 1.25%) as a sign of their confidence in the future.

There will be continuing investment in 2013 with the full benefits coming through in the latter part of the year, and the company states that "Access Intelligence's solutions are core to companies achieving compliance and there continues to be significant opportunities for growth, both within our enviable customer base and regulated markets as a whole."

The shares leapt an impressive 23% today, although the reasons for this are unclear since it wasn't driven by any news (a tip possibly? leaked news of a contract win or bid approach? who knows?). However, the company looks a good medium to long term bet to me anyway, and the following research note also suggests that at the current price of 4p, the shares are significantly undervalued:-

http://www.accessintelligence.com/downloads/07032013_accessintelligence_initiation.pdf

"Applying this suggested recurring revenue multiple range to Access Intelligence implies an enterprise valuation range of £11m to £14.4m, or 5.5p-7.0p, considerably above the current share price."

It should also be noted that during December, Joanna Arnold (Chief Operating Officer) bought £200,000 worth of shares at 4p a piece, and other Directors were also hefty buyers during March 2012.