Wednesday 12 September 2018

How bizarre ?!

You know that a company's shares are going to plunge 20% when it opens up with the first paragraph of a trading statement as follows:-

https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/TRAK/13787221.html

"The Board is pleased to report that the outlook for the year ending 31 March 2019 is in line with market expectations, with an improved financial performance driven by continued growth in the telematics business more than offsetting the eliminated CEM activities. "

Yes of course I'm being sarcastic, but that's exactly what happened to Trakm8 shares when they released a trading statement this morning. How utterly bizarre? Or is it?

Reading the full statement, John Watkins, Trakm8's Executive Chairman goes on to confirm that the first half has been weaker than the comparable period last year, but that the second half should be considerably stronger than last year, and hence an in-line performance.

Clearly the market doesn't believe that "in-line" with market expectations will be achieved given today's 20% fall in the share price.

It's still a little strange since the first half underperformance was flagged up with the 2018 full year results back in early July. A 20% fall in the share price. Really?

Whilst the £1.6m shortfall in low margin CEM activities was expected since they've been exiting this area for the last two/three years (and it should now be complete), perhaps investors have been spooked by the following sentence,

 "however at one of our significant insurance customers, telematics policy cancellations have modestly exceeded new policy sales."

Maybe it's just me, but I can't say I'm particularly concerned given the final paragraph of the trading statement?

Besides, the car insurance market is highly competitive, surely you could expect this from time to time? In addition, Trakm8 boast both Direct Line and Marmalade as clients amongst others. If I had a criticism about this issue then I'd question why they bothered to mention it at all?

The final paragraph has this to say:-

"The second half of the year will benefit from resumption of volume shipments to the significant customer referenced above and increased momentum in the fleet management market.  The Directors are also confident that new contracts to be awarded, particularly in the insurance space, will drive additional revenues in the second half of the year."

Anyway, whatever, the share price declined 20% today on higher than usual volumes and in fact has been declining in fits and starts since it reached nearly 400p towards the end of 2015 and early 2016.

The share price currently sits at 59p and the company has a market cap of £21m.

Death, doom, damnation and destruction! Sack the board! The shares are heading to zero. Results are awful. Where are the revenues? Where are the profits? Where is the cashflow? This is a dying industry and growth has stopped altogether.  I urge you to sell before it's too late!!! I'm taking the p*ss of course. Let's have a look at the financials.

Firstly, last year's full year results show revenues at around £30m with gross margins at 49%. Basic profits were £1.6m with adjusted profits coming in at £2.8m which puts the shares on a historic p/e ratio of 13 and 7 respectively. Assuming that the figures for the full year are better than 2018 then Trakm8 is already looking cheap.

Of the £30m revenues reported, more than a third were of a recurring nature which is always very welcome. The NAV stands at £22m (although largely attributable to intangible assets) and so the shares currently trade at a discount to NAV with a low forward p/e ratio. Operating cashflow was £4.7m in 2017/2018 and they had £3.4m cash on the balance sheet. The balance sheet looks pretty solid to me. 

In other words, there's an awful lot of bad news already priced in.

In early August they informed the market that they were doubling the size of Group HQ and manufacturing facility in Coleshill. Correct me if I'm wrong, but it's not something I think they'd do on a whim? The last reported number of devices in operation where 251,000 (March 2018) and the new facilities are capable of producing 1,000,000 such devices per year. That's quite encouraging isn't it?

I can't predict the wild gyrations of the share price over the next 6 months or so given the highly illiquid nature of trading in Trakm8 shares (and neither can anybody else btw), but the company is very cheap in my opinion, and as ever I'm here for the long term with high expectations for the next two/three years as the devices in operation continue to grow.

Incidentally, it's worth comparing and contrasting the financials of Trakm8 with Quartix (same space)which is currently on a market cap. of  £141m and has exited the insurance sector altogether.

As always, I offer no investment advice and just share my personal thoughts.

twitter: @michae1mouse




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