Journeo is en route to quadrupling its profit

Journeo (JNEO:235p), a transport systems provider, has delivered eye-catching results that highlight its organic momentum and the benefit of a smart bolt-on acquisition.

The group operates fleet systems, passenger transport infrastructure systems and provides software management for rail information displays in stations. Demand is being driven by blue-chip transport operators and local authorities tapping into UK government funding to upgrade their services so public transport becomes the first choice for passengers.

Notable first-half contract wins include awards worth £2.6mn with Transport for Wales and Cardiff City Council for digital displays that provide passengers with real-time transport information and media messaging for routes and services. The group also secured a £1.1mn contract extension with Arriva UK Bus.

This is in addition to Arriva’s three-year fleet-wide software-as-a-service (SaaS) contract for Journeo management software. The technology provides fleet operators with tools to improve operational efficiency, revealing valuable data insights into vehicle performance in real-time. That contract contributed to the group’s fleet transport systems business, which increased connections by 20 per cent to 12,000, or 30 per cent of the UK bus market, and delivered 61 per cent higher revenue of  £7.9mn.

Moreover, Journeo entered the second half with a £27mn order book and £55mn sales pipeline. It is making impressive progress converting it, having announced £4.25mn of contract wins with local authorities in the past fortnight alone.

Bolt-on acquisitions

The group's impressive 41 per cent underlying organic revenue growth is being complemented by the January 2023 earnings-accretive acquisition of East Midlands-based Infotec. The company is a leading provider of innovative display solutions and the UK's leading rail passenger information equipment provider, with more than 15,000 displays in operation. Infotec delivered £2.5mn of Journeo’s gross profit of £6.4mn, a healthy return on the £8.7mn acquisition price. Infotec provides Journeo greater market access for its products and technologies within the rail sector and has limited customer overlap, thus providing cross-selling opportunities. 

Journeo has also been strengthening its expansion into the Nordic markets and adding further scale with its cloud-based offering. Earlier this month, the group used €2.5mn (£2.2mn) of its £10.7mn (67p) net cash to acquire MultiQ Denmark, a leading Danish intelligent transport systems technology provider, on a multiple of 10 times operating provider. Recurring revenue from MultiQ’s SaaS offering accounts for 40 per cent of its total revenue.

Following two recent earnings upgrades, house broker Cavendish expects full-year pre-tax profit to almost quadruple to £3.7mn to produce earnings per share (EPS) of 19.7p, rising to £4.2mn and 22.7p, respectively, in 2024. On this basis, the shares are rated on a 2024 price/earnings (PE) ratio of 10.3, an unwarranted 22 per cent discount to peers.

So, having advised buying the shares at 173p (‘Alpha Research: The cheap small-cap thriving on transport spending’, 16 June 2023), and reiterated that advice at 181p (‘A travel stock with a potential 49% return’, 3 August 2023), I am upgrading fair value from 275p to 300p based on target cash-adjusted PE ratio of 11 for 2024. Buy.

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