To put the scale of the earnings upgrade cycle into some perspective, when I first advised buying the shares at 92p earlier this year ('Zoning in on a profitable price move', 16 Feb 2015), analyst Lorne Daniel at brokerage finnCap predicted the company would deliver EPS of 8p in the 12 months to the end of March 2016. He now predicts EPS will come in at 11.3p, representing 92 per cent year-on-year growth.
Moreover, with recurring revenues from the fleet management, insurance and vehicle service side of the business surging by two thirds to £4m in the six months to end September 2015, reflecting the sharp increase in the number of devices reporting to Trakm8's servers, then higher-margin annualised revenue is now around £8.5m and accounts for about a third of finnCap's revenue estimate for the company. Around 135,000 vehicles are now fitted with telematic and data devices reporting to the company's servers, up by around 74 per cent in the past 12 months.
The other key take for me in the interim results was the operational performance of previous acquisitions and in particular the incremental benefits Trakm8 is reaping from the acquisition two years ago of BOX Telematics. Prior to the acquisition, the company outsourced all major manufacturing to third parties. However, with access to BOX's manufacturing and assembly facilities, Trakm8 has been ramping up its own production volumes. This not only generates economies of scale, but boosts margins too: in the latest six month trading period, BOX manufactured £1.8m worth of telematics devices for Trakm8, a rise of 63 per cent year-on-year.
Importantly, the more recent earnings accretive acquisition of DCS Systems in June this year is delivering too. This business designs and distributes camera systems for the motor vehicle, bicycle and security markets under three main brands: Roadhawk, Dogcam and Lawmate. Recently, Volvo Cars listed the Roadhawk camera in their official accessories as part of a new contract, and parcel delivery firm TNT placed an order after a trial revealed that more than half of its drivers changed their driving behaviour for the better, and three quarters felt the cameras improved their personal safety and security.
The DCS acquisition reflects Trakm8's strategy of augmenting its organic growth with selective bolt-on deals that expand its telematics offering to both insurance and fleet customers. It makes perfect sense in this case given that cameras are being increasingly used in a wide range of applications, such as forward facing vehicle cameras which record driving incidents and help to mitigate the risk from 'crash for cash' accidents. The £3.3m cash consideration for DCS equated to 5.5 times its pre-tax profit of £600,000 in the fiscal year to end April 2015, so was significantly earnings accretive as Trakm8 part funded it by drawing down £2m from a £5.7m debt facility with HSBC.
More earnings accretive acquisitions likely
I would expect further strategic acquisitions to follow given that only £3.5m of that HSBC facility is currently drawn down and the company has cash of £1.4m on its balance sheet. Net debt of £2.2m, including finance leases, equates to 26 per cent of net assets. So with finnCap predicting a doubling of Trakm8's second half pre-tax profits to around £2.2m, and cash generation robust - total cash generated from operating activities of £1.3m in the latest six-month period exceeded that for the whole of the prior fiscal year - then a large chunk of Trakm8's borrowings will be paid down in the coming months. In turn, this gives the board the flexibility to seek further opportunities to enhance the double digit organic growth from its existing businesses. In the first half, like-for-like revenue increased 30 per cent.
But even without further earnings accretive acquisitions, I feel the shares have further to run. That's because analysts predict that Trakm8's businesses can lift the company's revenues by a fifth to £31m in the 2017 fiscal year (March year-end). So with an increasing amount of revenue falling down to the bottom line as revenue growth outpaces pressure on costs, then pre-tax profits are set to rise by half to £5.4m to produce EPS of 15.9p. On this basis, the shares are rated on 16.5 times fiscal 2017 earnings estimates, hardly a punchy valuation for a technology company set to deliver 92 per cent earnings growth in the current fiscal year, and 41 per cent the year after.
I am not the only one thinking this way as Mr Daniel upgraded his target price by over a quarter from 250p to 318p since yesterday's results, reflecting a target rating of 20 times fiscal 2017 earnings estimates. I am inclined to agree with that view especially as we can realistically expect investor sentiment, and those aforementioned earnings estimates, to be given another boost by likely earnings accretive acquisitions. There is no sign either that demand for Trakm8's products and services, and which has been driving robust organic growth, is waning at all.
Indeed, at the end of last month, Trakm8 reached agreement to supply a major US-based data company with its T10 BLE (Bluetooth Low Energy) telematics unit which communicates with mobile phones via Bluetooth to relay real-time journey data to the registered device. The new client is expected to purchase more than 25,000 devices during the first two years of the contract agreement.
The bottom line is that having seen the shares rise by 20 per cent to 300p after I last recommended running profits at 250p at the start of November ('Five companies that keep delivering', 3 November 2015), I feel that the share price has yet to reach a final peak. Offered in the market on a bid-offer spread of 257p to 262p, I recommend running your 185 per cent paper gains and target a return to the recent high of 300p, and potentially to finnCap's new target of 318p. Run profits.
Please note that I have written one other column today. For reference purposes please find enclosed a list of all the articles I have written in the past six months.
MORE FROM SIMON THOMPSON...
I have published 238 articles on the following companies in the past six months and five features on equity market strategy:
■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)
■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)
■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Breakout looms for mobile wonder', 12 May 2015)
■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)
■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)
■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)
■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)
■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)
■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)
■ Anite: Buy at 91.5p, target 110p ('Testing a breakout', 26 May 2015)
■ Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)
■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)
■ B.P. Marsh & Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)
■ Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)
■ Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)
■ Market strategy ('Financial Market Watch', 9 Jun 2015)
■ Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 June 2015)
■ 1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 Jun 2015)
■ Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 Jun 2015)
■ First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 Jun 2015)
■ Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small-cap wonders', 17 Jun 2015)
■ Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 Jun 2015)
■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 Jun 2015)
■ GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A triple play of small-cap picks', 23 Jun 2015)
■ Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small-caps', 24 Jun 2015)
■ Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 Jun 2015)
■ Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 Jun 2015)
■ Redde: Run profits at 138p, target range 150p to 155p; Trakm8: Buy at 175p, target 200p; Cohort: Buy at 312p, target 365p; Burford Capital: Buy at 175p, target 190p; Flowtech Fluidpower: Buy at 135p, target 155p ('Riding earnings upgrade cycles', 7 Jul 2015)
■ Crystal Amber: Buy at 161p; Stanley Gibbons: Buy at 258p; Somero Enterprises: Buy at 150p, target 185p; Globo: Buy at 49p, target 69.5p ('A quartet of small-cap buys', 8 Jul 2015)
■ H&T: Buy at 200p; STM: Buy at 47p, target 60p; Stadium: Buy at 113p, target 140p ('Exploiting upgrades', 9 Jul 2015)
■ Cambria Automobiles: Buy at 57.5p, target 75p ('Driving a re-rating', 13 Jul 2015)
■ Walker Crips: Buy at 47p, target 60p; 600 Group: Buy at 18p, target 24p; Henry Boot: Buy at 235p, target 260p ('A trio of small-cap value plays', 14 Jul 2015)
■ Bilby: Buy at 90p, target 120p; 32Red: Buy at 67.5p, ('Exploiting a valuation anomaly', 20 July 2015) target 90p; Marwyn Value Investors: Buy at 244p, target 275p ('Acquisitions drive earnings upgrades', 15 July 2015)
■ Vislink: Buy at 53p, target 70p ('Awarding success', 16 July 2015)
■ SPARK Ventures: Buy at 4.5p ('Exploiting a valuation anomaly', 20 July 2015)
■ W.H. Ireland: Run profits at 120p, target 140p; Safestyle: Run profits at 235p; Charlemagne Capital: Sell at 11p ('Cash rich small-caps', 21 July 2015)
■ Amino Technologies: Buy at 150p, target 180p; Arbuthnot Banking: Buy at 1,530p; Globo|: Buy at 49p, target 69.5p ('Primed for major re-ratings', 22 July 2015)
■ SPARK Ventures: Buy at 4.5p; Entu: Buy at 115p, target 165p ('Cashed-up for gains', 23 July 2015)
■ Capital & Regional: Buy at 60.25p, target 70p ('Hot property', 27 July 2015)
■ LMS Capital: Vote against proposals at EGM; Marwyn Value Investors: Buy at 238p, target 275p to 280p ('Game changers, 28 July 2015)
■ Stadium Group: Buy at 130p and take up open offer, new target range 155p to 160p; 1pm: Buy at 68p and take up open offer at 60p, new target 90p ('Powered up for gains', 29 July 2015)
■ CareTech: Buy at 245p, target 300p; Burford Capital: Buy at 170p, target 190p; K3 Business Technology: Run profits at 275p; Trakm8: Buy at 178p, target 200p ('Hitting the right numbers', 30 July 2015)
■ Non-Standard Finance: Buy at 107.5p; Software Radio Technology: Buy at 27.5p, target 40p; Character Group: Run profits at 500p; Communisis: Hold at 50p ('Value judgements', 3 August 2015)
■ Fairpoint: Buy at 138p, target 190p; Creston: Run profits at 155p; Sanderson: Buy at 71p, target 80p to 85p; Renew Holdings: Buy at 340p, target 375p ('Break-outs looming', 4 August 2015)
■ Globo: Buy at 42.75p, target 69p; Cambria Automobiles: Run profits ('Short sellers in for shock treatment', 5 August 2015)
■ Cohort: Run profits at 357p, target 375p; Cineworld: Run profits at 530p; Paragon: Buy at 412p ('Acquisitive growth drives re-ratings', 6 August 2015)
■ PROACTIS: Buy at 93p, target 117p ('Procuring growth', 10 Aug 2015)
■ Town Centre Securities: Buy at 310p, target 350p ('Equity market watch', 11 Aug 2015)
■ Equity market strategy ('Equity market watch', 11 Aug 2015)
■ KBC Advanced Technologies: Buy at 122p, target 165p; Getech: Buy at 59p, target 80p ('Fuelled for strong growth', 12 Aug 2015)
■ Pure Wafer: Run profits at 162p, target 178p; Inland: Run profits at 71.5p, next target 80p; Macau Property Opportunities: Take profits at 189p ('Bumper cash returns', 13 Aug 2015)
■ Inspired Capital: Accept cash offer of 21.5p; Record: Buy at 40p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('Bargain shares updates', 17 Aug 2015)
■ Equity market strategy ('Stay calm', 25 Aug 2015)
■ Capital & Regional: Run profits at 67p; Redde: Run profits at 152.5p; Cineworld: Run profits at 578p; Cohort: Run profits at 375p; H&T: Buy at 195p; Record: Buy at 33.5p; Bioquell: Buy at 137p, target range 170p to 185p ('Running bumper profits', 27 Aug 2015)
■ Equity market strategy ('A sense of perspective', 1 Sep 2015).
■ LMS Capital: Buy at 73p ahead of tender offer; STM: Buy at 53p, target 60p; Entu: Hold at 65p ('Shareholder activism works', 2 Sep 2015).
■ Henry Boot: Buy at 235p, target 260p; Amino Technologies: Run profits at 162p, target 180p; PV Crystalox Solar: Hold at 9.5p ('Planning for success', 3 Sep 2015).
■ Vertu Motors: Buy at 66p, target range 80p to 85p; Cambria Automobiles: Run profits at 68p ('Poised for a strong rally', 7 Sep 2015).
■ Avation: Buy at 127p, target 200p; Fairpoint: Run profits at 177p, target 190p, Redde: Run profits at 158p ('Get ready for take-off', 8 Sep 2015).
■ Stadium: Buy at 132p, target 155p to 160p; Somero Enterprises: Buy at 145p, target 185p; Flowtech Fluidpower: Run profits at 151p ('Switch on for gains', 9 Sep 2015).
■ Tristel: Run profits at 95p, target return to 110p; BP Marsh & Partners: Buy at 145p, target 180p; Character: Run profits at 505p; Greenko: Hold at 80p ('Small caps priced for gains', 10 Sep 2015)
■ Crystal Amber: Buy at 162p ('Crystallising gains', 14 Sep 2015)
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Avation: Buy at 148p, target 200p ('Flying higher', 14 October 2015)
■ Cohort: Run profits at 400p ('Cohort on a roll', 14 October 2015)
■ Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 October 2015)
■ Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 October 2015)
■ MS International: Buy at 180p, initial target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 October 2015)
■ Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 October 2015)
■ BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 October 2015)
■ Crystal Amber: Buy at 170p; Dart Group: three month trading buy at 468p; Grainger: three month trading buy at 247p; Leaf Clean Energy: await news on Invenergy asset sale ('A quadruple play', 22 October 2015)
■ UTV Media: Buy at 184.5p, target 215p ('On the right wavelength', 26 October 2015)
■ Globo: shares suspended at 28p ('Globo bombshells', 26 October 2015), ('The truth about Globo', 29 October 2015)
■ Getech: sell at 38p ('Getech warns', 3 November 2015)
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)
■ Getech: Sell at 38p ('Getech warns', 3 November 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)
■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)
■ Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven year high', 10 November 2015)
■ KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 November 2015)
■ Epwin: Run profit at 138p ('Decked out for further gains', 10 November 2015)
■ Plethora Solutions: Speculative buy at 5p, target 7.5p; Renewable Energy Generation: Speculative buy at 49p, target 60p ('Playing the takeover game', 11 November 2015)
■ Trifast: Buy at 116p, target 140p ('Engineering a chart break-out', 12 November 2015)
■ Software Radio Technology: Speculative buy at 23.5p, target 40p ('Break-even beckons', 12 November 2015)
■ Bioquell: Buy at 137p, target range 170p to 185p; Tristel: Run profits at 125p, targte range 130p to 135p ('Bug busting potential for short-term gains', 16 November 2015)
■ Communisis: Hold at 45p ('Communisis slammed for earnings miss', 16 November 2015)
■ AB Dynamics: Run profits at 320p; Stanley Gibbons: Hold at 90p; Pittards: Hold at 94p ('Bargain shares updates', 17 November 2015)
■ Bilby: Run profits at 133p ('Bilby's share price sparked alight', 18 November 2015)
■ GLI Finance: Buy at 45.25p ('High yield P2P play', 18 November 2015)
■ LMS Capital: Buy at 72p; Cenkos Securities: Buy at 180p ('Capitalising on tender offers', 19 November 2015)
■ Ensor: Buy at 99p, target 125p ('Bid watch', 23 November 2015)
■ Marwyn Value Investors: Buy at 216p ('Cashing in on a top performer', 23 November 2015)
■ Trakm8: Run profits at 262p ('On track for record earnings', 24 November 2015)
■ Walker Crips Group: Buy at 49p, targte 60p ('Profit from a profit surge', 24 November 2015)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
