To reduce carbon emission and meet its 2050 Carbon Net Zero goal, the UK Government wants to make public transport the de-facto choice for passengers.
However, it faces obstacles as changes in people's work patterns have led to a greater level of working from home and 'hybrid' working which has reduced commuter spending that transport operators rely on. This, coupled with the safety concerns surrounding personal space, made the Covid-19 pandemic the perfect storm for public transport.
Importantly, there are signs of recovery. The Department for Transport (DfT) statistics for 2021/2022 show an 80.6 per cent increase in UK local bus passenger journeys, the most popular form of public transport, indicating that public confidence in mass transit is returning. Public concern over the cost-of-living crisis is playing a part, too. With energy and fuel costs high, choosing the more cost-efficient and environmentally friendly option of taking the bus or catching a train is a win-win situation for all parties.
So, to drive mass adoption of public transport, the UK Government is providing substantial financial support through multiple initiatives including: William-Schapps Plan to improve rail services; £1.2bn Bus Service Improvement Plans; £220mn Zero Emission Bus Regional Areas (Zebra); and £5.7bn City Region Sustainable Transport Settlements.
The backdrop is incredibly positive for Journeo (JNEO:181p), a leading Intelligent Transport Systems provider that has been winning a raft of contracts from blue-chip transport operators and local authorities benefiting from Government funding.
Riding an upgrade cycle
Journeo has three operating companies in the areas of fleet systems, passenger transport infrastructure systems and software management of information displays hardware for rail applications in stations.
The group’s fleet systems division delivered a stand-out first half performance, driving up revenue by 61 per cent to £7.9mn. The business provides vital on-board safety and efficiency solutions to the bus and rail industry including CCTV video surveillance to improve passenger & driver safety, telematics for vehicle and driver performance monitoring, real-time communications for remote condition monitoring and automatic passenger counting.
Journeo management software provides fleet operators with powerful tools to improve operational efficiency, revealing valuable data insights of vehicle performance in real time. Sold as Software-as-a-Service (SaaS), it integrates with new and legacy on-board solutions to provide a complete view of on-board system health monitoring, whilst enabling customers to perform key tasks more easily, such as video evidence handling, driver performance monitoring and operational safety management. It’s proving popular with the number of connections up 20 per cent to 12,000 in the first six months of this year. That still only represents 30 per cent of the 40,000 buses in the UK, thus offering scope for eye-catching growth to continue for some time yet.
In addition, the technology is installed on over 800 of the 12,000 trains operating nationwide, and there is potential to materially grow the installed customer base following Journeo’s acquisition of Infotec at the start of 2023.
Infotec acquisition supports growth across rail industry
East Midlands-based Infotec is a leading provider of innovative display solutions and the UK's leading rail passenger information equipment provider, with over 15,000 displays in operation. The company services 80 per cent of the UK's rail network and is one of the few UK display companies that designs, makes, tests and distributes its own products, which include rail information displays for main, hub and small stations. Every day, 2.19mn passenger journeys rely on Infotec's products, which are installed in 1,476 stations and vehicles across the UK and overseas.
Strategically, the acquisition is providing greater market access for Journeo's existing products and technologies within the rail sector, where the group previously had a relatively small presence. Infotec has limited customer overlap with Journeo, thus providing cross selling opportunities. In the first six months of 2023, Infotec delivered revenue of £9.3mn, but strip out its contribution and Journeo generated 41 per cent higher underlying revenue, highlighting the strong organic growth across all parts of the business.
Double-digit growth across passenger transport systems
The group’s Passenger Transport Infrastructure Systems business delivered 16 per cent higher first half revenue of £4.6mn and is well placed to continue delivering a strong performance. The unit focuses on solutions for the static infrastructure side of transport, designing, manufacturing, installing, and managing the hardware and software for electronic public transport information systems, such as digital signs at bus shelters, train stations, ferry terminals and airports.
Journeo’s latest electronic passenger information software controls the content displayed on public transport information estates and gives local authorities and Passenger Transport Executives (PTEs), the local government bodies responsible for public transport within large urban areas, the power to display scheduled and real-time transport information in conjunction with media messaging for routes and services. The ruggedised outdoor display products are designed and manufactured in long-lasting and robust materials to withstand harsh environments for years.
Journeo uses high-performance imaging panels, the latest communications technology and low-energy semiconductors. Given its ability to reduce power consumption – signs can be powered using renewable energy – and to detect defects in advance, management believe they offer a value proposition to customers.
Having established a presence across 44 per cent of the UK-based authorities which have influence over the transport sector, the business has a major opportunity to expand its offering. That’s because only a small proportion of bus stops have some form of electronics installed and government backed funding initiatives are driving increased adoption of the technology in a highly fragmented market in which Journeo is making its presence felt.
Earnings upgrades
House broker Cenkos Securities has taken note of Journeo’s upbeat pre-close trading update, upgrading its 2023 revenue estimate by 24 per cent to £41mn, implying that full-year pre-tax profit will almost quadruple from £0.9mn in 2022 to £3.4mn this year. Factoring in the higher share count resulting from January’s £7.35mn equity raise to fund the Infotec acquisition, analyst Andrew Renton expects the group to deliver 81 per cent higher earnings per share (EPS) of 18.7p. On this basis, the shares are rated on a modest current year prospective price/earnings (PE) ratio of 9.7.
Moreover, the board are already guiding investors to expect £42mn of revenue in 2024 and £50mn in 2025, and at higher net margins as the impact of component shortages in supply chains improves and a greater proportion of higher margin contracts in the sales mix. Cenkos’ newly introduced 2024 pre-tax profit and EPS estimates of £3.9mn and 21p, respectively, factor in a three percentage point higher gross margin of 33 per cent and £0.2mn saving on finance costs, too. On this basis, the shares are rated on a 2024 PE ratio of 8.6 even though the group is expected to double EPS over the two-year forecast period.
Journeo is also a cash generative business, hence why Cenkos has upgraded its closing year-end net cash forecast from £4.9mn to £5.5mn (34p) and predicts £8.6mn (53p) net cash at the end of 2024. That’s a healthy cash position for a £29.3mn market capitalisation company and one that can be recycled into earnings accretive acquisitions to drive further earnings upgrades.
It’s certainly not priced in with the average 2024 PE multiple and cash profit multiple to enterprise valuation of UK transport focused electronic component and SaaS providers around 50 per cent higher than the rating of Journeo. Peers include Tracsis (TRCS), Synectics (SYN), Vianet (VNET) and TT Electronics (TTG), companies which share similar characteristics to Journeo in terms of the services they provide such as collecting data to improve efficiency of their customers’ operations.
High barriers to entry
The provision of technical services to the UK transportation sector has high barriers to entry which is supporting the group’s strong contract momentum. In fact, Journeo has been awarded no fewer than nine major contract wins worth £7.5mn since March 2023, building on last year when the group won its largest ever contract – a three year agreement with First Bus UK – and its largest software-led sale – a two-year agreement with Scotrail.
The requirement to service large fleets of vehicles and the associated network complexity creates challenges for new entrants into the market, as does the critical cost of failure. Journeo operates in market segments that have relatively few competitors due to a combination of technical complexity, unique solutions (backed-up by internal intellectual property) and the management of long lifecycle assets across a large geographic area.
Furthermore, Journeo has developed its own proprietary software and an advanced research & development (R&D) platform that integrates solutions onto the cloud, is capable of scaling significantly, and can manage complex customer requirements. All these factors create a moat around the business.
Risk assessment
Of course, there are several risks to consider. Firstly, Journeo has an international supply chain and a growing overseas customer base, so has tied up more working capital in building a buffer of inventories to mitigate supply chain disruption. It’s worth doing as the revenue visibility from the growing order book de-risks the investment case. For instance, Infotec is delivering a $18mn (£14mn) contract to supply displays for 535 new Kawasaki R211 subway trains in New York City.
Secondly, as a customer-led business that makes investments in R&D across niche markets in which it is a recognised expert, Journeo needs to keep pace with changes and improvements in relevant technology and link this to its customers’ changing needs.
Thirdly, whilst the National Bus Strategy has been announced, it is not yet clear how the funding will be allocated and how much will come from existing funding streams such as Zebra and Concessionary Travel Funding. Operator customers may have less leeway to specify the equipment and hardware that they use within their fleet, too.
Fourthly, 45.5 per cent of the 16.2mn shares in issue are held by the top seven shareholders which include well respected fund managers Slater Investments, Downing LLP, and Octopus Investments. The directors hold 3.7 per cent of the shares, too. However, although the shares are tightly held, they are readily tradeable in bargains of 3,000 shares within the official 177p to 185p bid-offer spread.
Credit risk is not an issue as Journeo has a blue-chip client base and only booked a £12,000 impairment charge on its trade receivable book last year, an insignificant sum in relation to a trade receivable balance of £4.7mn.
Target price
So, having advised buying the shares at 173p (‘Alpha Research: The cheap small-cap thriving on transport spending’, 16 June 2023), and with analysts upgrading forecasts, I see potential for 49 per cent share upside to my 275p fair valuation based on target cash-adjusted PE ratios of 12.9 (2023) and 10.6 (2024). Buy.
