This tech group is riding the rail overhaul

In late November, members of the RMT union agreed to a backdated pay offer of 5 per cent, meaning their mandate to strike was withdrawn. This guarantees the union’s members will not pursue further industrial action – at least for a few months. Meanwhile, members of Aslef, the train drivers’ union, have voted in favour of strike action in the new year. 

This fractious climate has not exactly encouraged investment in transport infrastructure. Rail technology firm Tracsis (TRCS) said that industrial disputes have “slowed decision-making” as customers were forced to focus on the continuous re-planning of services and timetables. With the company's shares down some 6 per cent over the course of the last year, it’s clear investors are wary of what could be perceived as a volatile sector. But with a US expansion on the cards, and a newly clarified operational structure, the UK’s railway rows won’t constrain the company’s growth forever.

Simplify and rationalise 

At its core, Tracsis is a provider of software and related services to train companies (although this cohesive identity is a fairly recent development). Across the year to the end of July, management whittled down the company’s 10 existing divisions into four units: rail technology UK, rail technology North America, professional services, and traffic data and events. You’d be forgiven for wondering what the latter vertical has to do with railways. The answer is: not a great deal.

“The prior CEO came out of private equity and, to give him his due, he really built the business up to what it is today,” notes Stifel analyst Peter McNally. “But along the way he made a lot of acquisitions, which were perhaps non-core. A lot of the business was part of a private-equity-style roll-up – bought for profitability at a very reasonable price – but didn’t really fit.” The current chief executive, Chris Barnes, has been rationalising the group’s structure ever since he joined in 2019.

In the three months to October, management started to cut duplicated roles and introduced a group-wide IT support service, among other measures. They expect the ongoing transformation to add up to £2mn of non-repeat costs across the full financial year, with spending weighted towards the first half. These outlays will be recorded as exceptional costs, so that analysts and investors can better understand the company’s year-on-year trading performance.

While it might be like a tangential line of business, the traffic data and events division posted record revenue in 2023. Turnover was up 12 per cent to £28.8mn as demand for music and sporting events rebounded to pre-Covid levels. However, management no longer draws attention to this division in its conversations with investors – preferring instead to style Tracsis as a “rail technology business with a big data platform”.

Last month, Barnes told the IC that the company’s rail software products have given Tracsis access to a huge amount of real-time information. “If you use that data appropriately, you can do some really powerful decision-making around capital investment, operational performance and all sorts of service recovery,” he said. Management is now striving to rebalance the business so that the railway software and technology becomes the primary driver of medium-term earnings growth. At present, it accounts for around 50 per cent of sales and three-quarters of earnings. “In five years’ time, rail tech will probably be 80 to 90 per cent of revenue and almost 100 per cent of our profits,” Barnes added. 

Breaking America

This vision will be aided by an increased presence in the North American market, which is not exactly renowned for its extensive or modern train infrastructure. Unlike the UK – which has a single railway network owner and a few dozen operators – the US is home to hundreds of owner and operator entities. To gain a foothold in the market, Tracsis acquired New York-based RailComm, a fellow technology and services provider, in March 2022. 

The purchase gave it access to the company’s existing sales network and client base. Ultimately, the group is hoping to exploit what it sees as a gap in the middle of the railway technology market. The sector is currently dominated by Wabtec (US:WAB), a company originally founded by investor George Westinghouse that has a market cap of nearly $22bn. According to Stifel’s McNally, the problem with this incumbent player is the prohibitive cost of its product suite. 

“The rest of the US market is made up of these small, ‘mom-and-pop’ companies that don’t have a lot of depth,” he said. “Their products aren’t a full package that adheres to technology standards or is built with enterprise-grade security. There hasn’t really been an in-between before, so I think that’s where Tracsis fits.” US revenue more than doubled to £8.8mn in the 12 months to July, a sure sign that momentum is building even if most group-wide sales remain domestic.

Crucially, not all of Tracsis’ domestic customers are embattled train companies. The group also provides smart-ticketing solutions to transport authorities. It recently won two contracts for its pay-as-you-go ticketing system – which allows users to 'tap in' using their payment cards at ticket barriers – with both deployments scheduled to go live in the current financial year. Only Transport for London currently has such a system in place, meaning there’s plenty of opportunity for Tracsis to roll out its solution in other UK cities, or even across the national rail network. 

The fact is, much of the support infrastructure currently used across the UK and US railways is stuck in an analogue age. Timetables might be recorded in an Excel spreadsheet, or worse, written down on a sheet of paper. Thus, the opportunity for a company like Tracsis – which provides digital tools to optimise the movement of people and rolling stock – looks large. The question for would-be investors is whether this potential is reflected in the shares.

The stock now trades at almost 23 times projected earnings for the current financial year – placing it firmly outside of bargain territory. Whether Tracsis should be considered a growth stock or a quality play whose value reveals itself over several years is a fairly moot point. What we can say is that its top-line growth has averaged 16 per cent over the past five years, suggesting the company could start to benefit from operational gearing if it can right-size its cost base and use its capital-light assets to greater effect. 

Tracsis ended its most recent financial year with cash before lease liabilities of £15.3mn, meaning the business is equipped to make further acquisitions. Margins are also likely to improve as the group exits an extended period of capital and operational expenditure. It is clear the rail business is in need of some thorough modernisation – and there are very few technology companies that can help it along this journey. Strikes or no strikes, demand for Tracsis’ products should proceed apace.