TRAKM8 final results

I last wrote about Trakm8 at the end of April following a very positive trading update. This is a small company that is well below the radar of most investors and valued at just £3.3m.

They released their final results on Monday, and they are certainly very encouraging. I am becoming increasingly confident that this small outfit is a hidden gem that will prosper in the short, medium and long term.

As mentioned in my last report, as expected revenues for the year came in below last year's figures at around £4.75m (2012 - £5.22m). The group made a small operating profit and diluted EPS was 0.78p, slightly above last year despite lower revenues. This puts the shares on an historic p/e ratio of 22 which makes the shares look expensive on first glance.

However, in my view, the company is extremely cheap. Firstly, Trakm8 have invested heavily for growth this year, and despite an increased overhead of around £50,000 per month, the company have remained profitable. This is due to their robust financial model that now places a greater emphasis on their high margin solutions and engineering services divisions rather than their product division where revenues are less predictable and margins far tighter. Products are still an important segment, but not the most strategically important segment.

Gross margins improved from 64% in 2012 to 72% this year due to continually improving recurring revenues. The company is generating healthy amounts of cash and cash balances increased 29% during the year to £1.41m at year end. Net assets increased to GBP2.52m (2012: GBP2.38m).

The important point with Trakm8 is that it is generating cash and profitable with a healthy balance sheet. Moreover, their investment in growth is already making a large impact with revenues already up by 23% on last year. The full effect should start to show through in the second half and in future years.

As revenues improve year on year, operational gearing will really kick in. For example, if revenues were to remain 23% ahead (although the suggestion is that the second half may see an even larger upturn) then full year revenues would be around £5.84m. If margins remain around 72% and assuming admin. expenses are around £3.8m then diluted EPS comes in at 2.1p putting the shares on a forward p/e of around 8. Projecting further forward then even a 10% improvement in revenues doubles the EPS figure and puts the shares on a forward p/e of 4.

I like what I see with Trakm8 and have in recent times considerably increased my holding. (Please note that a good broker will easily pick up decent amounts of stock at a discount to the quoted offer price).

The outlook statements make encouraging reading, and they have also announced the appointment of a new Non-Executive Director, Keith Evans.

John Watkins had this to say,""I am delighted to welcome Keith to the Board of Trakm8. His extensive experience and knowledge gained as a senior partner with PwC will prove invaluable in the next phase of our growth and investment plan and as Trakm8 evolves into a leading player within the international telematics industry".

Ambitious plans indeed, but so far they seem to be delivering on their promises.

As ever, no advice intended or given.