By using Big Data analytics to improve driver behaviour, Trakm8 is now a leading technology designer, developer and maker of telematics products and solutions. Primarily, the company makes its money by distributing its hardware and software through a network of distributors and by providing vehicle monitoring and tracking services direct to the business-to-business market. Trakm8's IP-owned products and services allow vehicles and drivers to be monitored, enabling organisations to manage deliveries and services, or track stolen vehicles to within five metres. The product offering also includes driver behaviour management systems that can reduce fuel consumption by 10 per cent or more, reduce risk of accidents, and make logistics routing & scheduling packages more efficient too.
As the latest contract with Marmalade highlights this is proving a popular and highly profitable niche to be operating in. Stripping out the £4.2m contribution from the acquisition of BOX Telematics, acquired by Trakm8 in October 2013 in a £3.5m deal, I estimate that the company's underlying revenues increased by two thirds to £4.3m in the six months to end September 2014. This heady growth rate is set to continue as like-for-like new orders were 53 per cent ahead at the end of December 2014, buoyed by a raft of new orders. Customers include Direct Line Group, Eon, the AA, Fujitsu and Kubota. These are not one-off deals either as the company's annualised recurring revenue of £5.3m is the equivalent of 30 per cent of the £18m current fiscal year revenue forecast of analyst Lorne Daniel at brokerage finnCap.
Furthermore, the scope of this smart telematics technology covers an extensive range of commercial vehicles too. For instance, Trakm8 has been working with Kubota, a leading manufacturer of tractor, groundcare and construction machinery, for some time. Having supplied the company with its secure device for the past three years, Trakm8 strengthened its partnership by signing a deal to supply both its hardware and monthly subscriptions service to the Trakm8 hosted web portal to a range of Kubota's high performance machines. For Kubota's customers, this will ensure improved security for their vehicle fleets. Logistics firms can see the benefits too. Downton, a company with 1,350 employees and one operating 600 tractors and 1,800 trailers from 11 distribution hubs nationwide, signed a contract with Trakm8 to supply 1,450 telematics units for a period of five years.
The company's high profile Direct Line contract is also progressing well and I understand that one in every five of the insurer's policies issued to under 25 year olds are being sold on condition that the vehicle is fitted with a Trakm8 telematic device. At the end of September, Trakm8 had around 80,000 such units reporting to its servers, up a third in only six months, and the company has a number of significant bespoke trials in progress with potential customers.
The combination of increasing recurring revenues, a decent conversion rate of potential orders to firm contracts, and the natural operational gearing effect on profits of increasing sales, are the key attractions for me with this business model. Importantly, I believe the progress the company is making has yet to be fully priced into the valuation.
Strong profit growth and acquisition opportunities
Ahead of its full-year results in June, expect Trakm8 to release a trading update in April and one that is likely to make a pleasant read. That's because the company is on course to deliver a near doubling of turnover and pre-tax profits to £18m and £1.7m, respectively, in the 12 months to end March 2015. Having booked a pre-tax profit of £717,000 on revenues of £8.5m in the first half to end September 2014, those aforementioned forecasts from finnCap look achievable to me once you factor in the contribution from the contract wins I have highlighted above. On this basis, expect EPS of 5.7p. Please note that the IFRS reported numbers in the forthcoming full-year results are set to show a quadrupling of profit as the costs associated with the Box Telematics acquisition held back the reported numbers in the previous financial year. I prefer to focus on the underlying figures.
Moreover, the financial year to end March 2016 will see another step change in profitability in Trakm8's operations as the full benefits of the raft of contract wins last year, and the fulfilment of that robust order pipeline, translate into another sharp rise in turnover. Lorne Daniel at finnCap predicts that revenues will rise a further 18 per cent to £21.3m to drive up pre-tax profits by 41 per cent to £2.4m, and produce EPS of 8p. On this basis, the shares are currently only trading on a prospective PE ratio of 11.
In terms of the balance sheet, finnCap is pencilling in a net cash position of £700,000 by the end of March 2015, so after you factor in a £4m bank facility with HSBC arranged in October comprising a £3m term loan and a £1m revolving credit facility, then the company has ample cash available to fund its working capital needs. Current assets of £7.2m exceeded current liabilities by around £2.2m at the last balance sheet date. In fact, the board noted at the end of last year that "it continues to actively seek acquisition opportunities".
That's a point well worth noting because by using its low-yielding cash pile and low-cost debt facility to finance sensibly priced acquisitions, then there should be ample scope for earnings upgrades if Trakm8's board buy prudently. And the directors have a vested interest in doing so as chairman John Watkins owns 21.28 per cent of the issued share capital, finance director James Hedges has a 7.45 per cent shareholding, engineering director Tim Cowley and related parties owns 6.57 per cent and chief technical officer Matt Cowley holds 5.33 per cent. Combined these four directors own 40.63 per cent of the issued share capital out of a total of 55.7 per cent of the equity not in public hands.
True, there is no dividend at the moment, but this is a fast growing company so it makes sense to recycle cashflow back into the business to fund both organic and acquisitive growth at this stage.
Technical set-up
It's not just the fundamental case that is supportive, the chart set-up is encouraging too. In fact, having tested last May's intra-day share price high in early January this year, Trakm8's shares pulled back to unwind their overbought position and now look poised to launch an assault on January's 96p closing high, a level from which the price has been consolidating its gains in the past six weeks. Bearing that in mind it's worth flagging up that the 14-day relative-strength indicator (RSI) is showing a reading of 60, so is well below an extreme overbought reading, thus offering scope for the share price to rally through that 96p key price level into blue-sky territory.
For good measure, the share price is marginally above both the 20-day and 50-day moving averages, positioned at 87p and 88.5p, respectively, so is not overextended above its short-term trend lines. The moving average convergence divergence (MACD) momentum indicator also looks to be on the point of giving a positive cross over buy signal, confirmation of which would signal that the consolidation period is over and the next leg in the share price has started. But I would not wait for that signal as I feel strongly that an imminent chart break-out is on the cards, so rate Trakm8's shares a buy now on a bid offer spread of 90p to 92p. My fair value target price is 120p, or the equivalent of 15 times' fiscal 2016 earnings estimates.
Please note that this is a small cap company with a market cap of £26.5m and having reviewed recent trading volumes, it would appear that you can deal within the bid-offer spread in bargain sizes up to 7,500 shares.
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
