Small Cap Value Report (28 Nov 2016) - LVD, TRAK, STR

29th Nov '16 by Paul Scott

16 comments 13046 reads

Good morning!

Here is yesterday's report, apologies for it being late.

Lavendon (LON:LVD)

Share price: 218p (up 6.9% today)
No. shares: 170.0m
Market cap: £370.6m

Another potential bidder emerges - great excitement for Lavendon shareholders, as a second potential bidder emerges. This is the story so far;

22 Nov 2016 - a Belgian company called TVH Group N.V. (with branches worldwide, and turnover of E1.2bn in 2015) announces a final cash offer for Lavendon at 205p. This is the first thing the market knew that any takeover approach had been made, and Lavendon shares shot up from 139p to 197p.

TVH seems mainly interested in Lavendon's M.East business (where it is market leader), but also LVD's UK & French businesses are a good fit with TVH's operations in other European countries.

22 Nov 2016 - just 39 minutes after TVH's announcement Lavendon responded. It rejects TVH's offer, and declines to recommend it. The reasons given are concerns over execution risk, but more importantly that TVH had failed to gain enough support from LVD shareholders.

Lavendon reminds the market that it had recently issued a positive Q3 trading update.

25 Nov 2016 - in a very unusual move, it appears that TVH is taking a hostile takeover approach, by reporting that it has acquired 9% of Lavendon shares itself. Although some of these came from an institutional shareholder which had previously agreed to accept the TVH takeover bid. So TVH now either owns, of has irrevocable undertakings from just 16.9% of Lavendon shares - nowhere near enough to go ahead with its bid.

28 Nov 2016 - a second potential bidder enters the fray. Loxam SAS announces it has made a "preliminary approach" to LVD regarding a possible cash offer. It urges shareholders to take no action with regard to the existing TVH offer. So this looks like a blocking move, to dissuade more LVD shareholders selling out to TVH in the meantime.

Loxam is headquartered in France, and seems to operate in 11 European countries, plus Brazil and Morocco. It has turnover of E838m, so is a bit smaller than TVH, but more European-focused.

28 Nov 2016 - just 32 minutes later, LVD puts out its response statement to this latest bid approach. In it the company suggests that shareholders take no action. It points out that under the Takeover Code, Loxam has…

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apad

29th Nov '16

TRAK: "New Products" cost a lot to develop, have significant implementation problems, have significant maintenance problems and do not guarantee take up, unless they are developed in response to demand. TRAK have bet the balance sheet on the promise of software functions. Their technical credibility in this is very poor and they have effectively fallen off the back of the wave in a competitive industry. In my opinion there is no route back. Siren words about new products pipe the children away from the village.
apad

Paul Scott

Hi apad,

Their technical credibility in this is very poor and they have effectively fallen off the back of the wave in a competitive industry.

Can you back up those comments with any evidence?

The number of units they have reporting to their servers is up 18% in the last 8 months - hardly sounds like a business that has fallen behind.

Regards, Paul.

No I can't, Paul. This is an opinion based on their history of software activity and associated publicity regarding function. To me it falls into a pattern of (maybe naive) entrepreneurial activity without due attention to long-term costs. Evidence would require insider information.
Software development is widely misunderstood. Typically, an easily produced, prototype piece of software might require a commercial company to gear up the activity by ten to one to produce bomb-proof, maintainable commercial code.
"Units reporting to servers" Here we are directly opposed. My point is that if I am correct and the development/maintenance costs are not worth the market than the more (fragmented) business you generate the less money you make.
If I am not correct and their software products produce real customer benefit across the piste and are solid. Then there is a route back from this profit warning.
Watch this space, I guess.
apad

PhilHofGrowYourDough

Hi Apad,

Software development is widely misunderstood. Typically, an easily produced, prototype piece of software might require a commercial company to gear up the activity by ten to one to produce bomb-proof, maintainable commercial code.

I'd put the figure at more like 100-1. I used to work in a R&D software company that became the industry leaders in the Voice over IP protocol (SIP). Our Canadian software branch used to specialise in producing software that would go to trade shows to try to catch attention. These prototypes used to look slick but as soon as you went off piste or did something unexpected they'd fall apart.

Meanwhile they'd moan like crazy when the UK team went through a thorough software development lifecycle. You can't build a software company on a shaky development strategy and choosing a poor architecture at the outset will mean that attempts to extend the product will be hamstrung and eventually the difficult choice will have to be made to rework the architecture with no discernible product development,

Phil

doug2500

Sorry I Think I Might have done a thumbs down by accident. But I'm not sure so sorry if someone else did it.

Ramridge

Re. Trakm8 Holdings (LON:TRAK) My understanding is that moving from a fully licensed upfront sales model to a SaaS Model, not only impacts cash flows but also revenue recognition. I remember reading in a report some months back that the crossover in revenues & cash flow terms can be as long as 3 - 4 years.
So generally speaking, from an investor's point of view a company moving to a SaaS model is bad news in the short term, but good news in the medium to long term, as revenues and earnings become more predictable.

Personally I steer away from companies moving from traditional upfront sales to SaaS sales until they have completed the transition.

simoan

You can't build a software company on a shaky development strategy and choosing a poor architecture at the outset will mean that attempts to extend the product will be hamstrung and eventually the difficult choice will have to be made to rework the architecture with no discernible product development

Well it didn't do Bill Gates any harm :-)

All the best, Si

Kelvin Prescott

Hi Paul

thanks for the update on Trakm8. I have a bit of background in the telematics industry (see here http://www.stockopedia.com/content/how-do-you-value-a-telematics-business-125662/), and wouldn't invest. I think fair value, once Trakm8 has started to generate reasonable cashflows after capitalised development, is around 3 times revenue (that's c. 140-160p). However, it isn't generating reasonable cashflows yet and I would not be tempted unless/until the price was well below 100p.

You noted that unit volumes were up, which is normally a good sign. So why are unit volumes up 18% but revenue only 12% (noting that they acquired some business in the period as well)?

Because telematics is not the growth market that people expect - the barriers to entry are low and unit prices are under constant downward pressure. Its tempting to buy the whole Connected Car story, but I remember a certain company called Quindell that told a similar yarn....!

It's by no means a disaster, and it could turn round. For what its worth, I agree with the business strategy (build up software IP that creates competitive advantage), but don't yet see evidence that Trakm8 has got a real differentiation.

In this space, I think that Quartix (£QTX) is a much better business; albeit still overvalued. It has genuine profits, real cashflow and a solid balance sheet. But way way expensive..

cholertonandrew

I was watching Proactis' Mello presentation recently (given a year or so ago) and they pointed out when they moved from perpetual licenses to saas it took three years for them to get back to pre-transition revenues. Obviously once they did though that revenue stream was worth more being recurring and allowing new revenues to stack on top. Andrew

Re: Trakm8 Holdings (LON:TRAK) I must admit I am greatly attracted to it given the amount of negativity towards the company being expressed - it really appeals to my contrarian instincts!

I agree with Paul that there's a sound business here going through a period of re-adjustment that could make a good medium term investment. And in the short-term, if the share price stays depressed I can see it being a takeover target, especially if it has good technology and customers (which it does) and there are more highly rated overseas competitors. I'm really tempted to have a dabble... what's the downside from here if it earns around 10p for the full year? Risk/reward looks good to me.

Nick Ray

If this has happened on a software project:

We implemented a change in engineering leadership during the period and invested in additional engineers and the subsequent progress on project delivery has been excellent.

then I would be very wary until it all settles down. More people and a different leader is a common symptom of a project in deep trouble.

Nick,

The trouble is you can read too much between the lines if you want to. You can take the section you highlight as saying that there has been trouble, but the comment ends with "subsequent progress on project delivery has been excellent". I'm an engineer and so understand that not all projects go well (in fact the majority don't) but it's part of life within any technology business, and the best way of avoiding this is to not invest in any technology companies, not just Trakm8 Holdings (LON:TRAK). As I see it, they did not have to mention this at all, and so I see it as the company being open and honest, which should be viewed as a good thing IMO.

I can see that with VOIP it might well be way over ten to one PhilH. My number is based on experience with fairly straightforward algorithms, so is a minimum on a wide distribution, so to speak. Producing robust, fully annotated, software that can be managed generically is so much sunk costs that folks without industrial experience find it difficult to appreciate.
Paul has to go on the statement, but if it was the rag trade he would put a personal experience polish on his comments.
I find it impossible to accept that TRAK is sitting on perfectly formed and described software that is in great demand. If it isn't, then in my opinion, it is dead as associated costs will drain its life's blood. Paddling like crazy to stay still.
apad

Ted Johnson

Trakm8 Holdings (LON:TRAK) results: They did a presentation in September (available on piworld ) when it was revealed that they had set on a number of sales people to expand their sales , also more engineers to help in expansion of their product offering. These facts are also in the results write-up. Why have you not mentioned them as background to the change in earnings. If you spend hundreds of thousands in additional overheads but are not receiving associated revenue there must be a fall in earnings.
What was the result of Boohoo using margin to attract sales?

troytea

1st Dec '16

LON:TRAK share price demise after the profit warning reminds me of a section in Ed's ebook on profit warnings. If you're going to sell on pw, sell quickly.

knighty

5th Dec '16

Dont you think its a bIt odd that Bill Duffy a director buys £40000 of shares(20000 at £2) a couple of months before this drop in price.
He at least should know whats going on

Small Cap Value Report (28 Nov 2016) - LVD, TRAK, STR

Lavendon (LON:LVD)

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Paul Scott

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