Zesty and promising or just a lemon?

Serial disappointer Mediazest gave a welcome update to the market yesterday with an excellent (and somewhat unexpected) trading update:-

https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/MDZ/13793984.html

In short "for the half year ending 30 September 2018, the Board expects to report revenue in the region of £1.8million (2017 £1.3million) and a maiden Net Profit for the Group of approximately £90,000 (2017: loss of £149,000)."

Now that's impressive for a company with a market cap. of less than £1.5m.

So what's my relationship with this company? Well I have a small amount invested in Mediazest which is just enough to keep me interested.

Late 2016, almost on a whim I bought a reasonable sized holding in MDZ when I was seduced by it's lowly market cap., promises of imminent profitability and hints at game changing contracts in the offing. Sadly, over the next year, these promises and game changers came to nought and the share price sank accordingly and I was left sitting on paper losses.

Bizarrely, at the back end of 2017, out of nowhere up pops a guy called Ian Hallett who begins the process of buying 20% of Mediazest, and the share price quickly accelerates upwards. I'm not complaining, I sell the majority of my shares into the rise and make around 10%. Not great but significantly better than the losses I'd previously been sitting on.

In truth, I half expected an offer to materialise for the company so I held a few but I'd reflected on my initial impetuousness and decided that given Mediazest's history and less than convincing balance sheet that I couldn't look a gift horse in the mouth and was largely happy to sell the vast bulk of my shareholding for a small profit.

Equally bizarrely, Ian Hallett then sold his entire 20% holding within a year and the share price slumped again as quickly as it had risen, so overall I feel I've made the right decision but I'm equally happy to have a small holding in Mediazest given yesterday's trading update.

I've mentioned a couple of bear points and until we see the interims it's impossible to guess how the balance sheet looks. Clearly cashflow and cash at hand are important measures that were not referred to in the trading update. However, the fact that they've made a maiden profit (albeit for six months) is very encouraging, particularly in the context of a significant amount of recurring revenues being
generated and the associated higher margins. It's also worth noting that Mediazest boast an impressive client roster including Volkswagen, Clydesdale and Yorkshire Banking Group, HP, Opel, BMW, Ted Baker, Diesel, Kuoni, HMV, Halfords, Hyundai and several others. That's not bad is it?

I consider my holding here speculative. However, given the market cap. and illiquidity of dealing in the shares, if Mediazest do continue their growth and consistently deliver increasing recurring revenues and profits going forward then the share price will undoubtedly multibag.

As ever, these are just my thoughts and dealings and no advice is intended.

twitter: @michae1mouse

Interesting assumptions

In a follow up to my previous post on Trakm8, whilst I was unable to attend the recent AGM, I've just caught up with the video now available on their website:-

https://www.trakm8.com/corporate-videos

If you're a shareholder or prospective share holder then it's an hour well spent, and is very informative. Most notably for me are the assumptions looking forward.

They are certainly ambitious assumptions in terms of the growth in number of units.

One of the slides assumes that by 2021 (2.5 years) recurring revenues could be £26m.

John Watkins says that recurring revenues would then cover overheads and the profits reported will be the gross margin on everything else they do.

Back of a fag packet guesstimates by me. Assume recurring revenues make up 50% of total revenues then £52m revenue. Gross margin at 49% of £26m is approx. £13m profit.

P/E ratio of 20 for a growth company gives a market cap. of £260m. That's a share price of over £7.

If they achieve anywhere near those assumptions then the next 2.5 years could be rewarding from a current share price of 62p.

As ever DYOR, but short, medium and long term the company is looking cheaper by the day.

Twitter: @michae1mouse

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