Small Cap Value Report (4 Nov 2015) - TRCS, JDW, FEVR

4th Nov '15 by Paul Scott

11 comments 16183 reads

Good morning!

Just a quick report today, as I have to dash into London for a lunch, and then speak at the ShareSoc Masterclass being kindly hosted by IG Index - apparently it's like Fort Knox getting into there, so if you're also attending, don't forget to bring photo ID.

Tracsis (LON:TRCS)

Share price: 417p (down 5.7% today)
No. shares: 26.7m
Market cap: £111.3m

Results y/e 31 Jul 2015 - results look good, on an initial review. Two broker notes have landed in my inbox, both of which say that the performance is ahead of expectations.

EDIT: My interview with CEO & CFO held on 5 Nov 2015 (audio) - is here.

Fully diluted adjusted EPS was up 18% to 18.32p. Looking at the adjustments, as usual, the only one I have an issue with is share-based payments of £623k this year, and £315k. I see this as employee/Director remuneration, so it should be fully expensed when looking at profits and EPS, in my view.

Real profits for me are: adjusted EBITDA of £6,529k, less £724k depreciation, less £623k share-based charges, arriving at £5,182k. Take off a notional 20% tax, and that gives £4,146k earnings, resulting in a rather warm PER of 26.8 times.

Net cash - however, bear in mind that, as usual Tracsis has been decently cash generative - so there's no doubt that its profits are indeed real - and it now has £13.3m cash, or £12.9m net cash if you take off some relatively small hire purchase debt. That's clearly material to the valuation - even the lower figure is 11.6% of the market cap, or 48.3p per share. Enterprise value is therefore about 369p per share.

If you accept the company's definition of adjusted EPS (which is fairly standard, in fairness), then its reported 18.32p EPS equates to a cash-neutral PER of 20.1. That looks about the right price to me, providing the company continues growing.

Overseas expansion - perhaps one of the reasons the share price has come off a little today, might be because there's no firm news on USA sales. There were a number of pilots underway, but there doesn't yet seem to have been a big breakthrough. Overseas sales overall though have grown, so some progress is being made.

Remote condition monitoring - this is the most profitable part of the group, I believe. Sales fell sharply here,…

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Peter171

4th Nov '15

Paul, try and squeeze more info about the development progress/lack of in the US and why it is taking longer to get a foothold? Have they any thoughts on the Chinese markets?

Thanks, look fwd to hearing the recording
Peter

Aislabie

Wincanton ("worst balance sheet on the market" - P Scott) is still residing on your "Bargepole " list and on a net equity basis maybe it should stay there a little longer. But today's announcement of a sale of the records business (to Restore) shows that management is showing continuing grit in turning the company round.
Although it will still be carrying a higher than desirable debt load after this transaction they are keeping a fair bit of cash dry and I am generally prepared to give credit to management that can improve the situation from one that many thought hopeless. A cash raising is still very much on the cards but with the job done so far I think they can increasingly get one away without too much dilution.
Are you unpersuaded?

Delpher

Hi Paul

I attended a presentation by John McArthur at the ShareSoc Manchester event last week and the question of development in the US was raised and JM answered in very much the same vein as he did to your question last November. He confirmed that there was no capital expenditure in the US but did say that their rail system was 30 years behind that of the UK which was very encouraging to him. Clearly there are limitations on growth in the UK and therefore if the company is to maintain its growth rate it must begin to deliver its expertise abroad.It is surprising that in the recent f/y results there is only limited reference to the US pilot and Remote Control Monitoring. Please ask JM if he could expand on the outcome of the last 12 month's US pilot and what is the company's strategy for expansion in the US now that it has over 12 month's knowledge of the US market and experience of working with a US partner.

Ramridge

Hi Paul
Re. Tracsis (LON:TRCS) and questions for management. I think you have already picked this up but I would like to re-emphasise the point.

The company's cash conversion rate and FCF are very strong & healthy. This together with being debt free means that they should be utilising these resources either via strong organic growth or meaty acquisitions. However the co. seems to be shying away from both. A case of being too cautious and hence not making efficient use of available capital?

Regards, Ram

ed_miller

Paul, I think you are absolutely right to add back share-based charges to adjusted EBITDA - everyone seems to be conveniently omitting them from adjusted figures using the excuse that they are a non-cash item. So what? So is depreciation, but it is a real cost, and as Buffett says, if share-based payments are not remuneration then what are they? It's a real cheek!

I have sent you a message to ask McArthur why he funded the latest two acquisitions using debt and equity (as well as some cash) when Tracsis has healthy cash balances and he boasted to you last year that Tracsis generated excess cash so didn't need to take on debt or dilute shareholder earnings. What has changed?

Other than that, I like the story for Tracsis, and it's nice to see a straightforward set of accounts, though cashflow progression doesn't look all that exciting for such a pricy share (even adjusting for net cash), free cashflow does cover earnings nicely mind.

I have no position in Tracsis (and it will likely stay that way unless the price goes down or the free cashflow goes up, preferably both).

Regards,
Ed Miller

ln1sof

Hi Paul and readers,

Always find your reports very informative and have learnt a lot through reading them for a good while now.

You’ve previously commented on Vislink’s Vislink (LON:VLK) Value Creation Plan (VCP) and I wonder if you noted the announcement (http://www.scapa.com/files/General_Meeting_2015_-_Notice_of_Meeting_-_Final.pdf) from Scapa Group Scapa (LON:SCPA) yesterday calling a General Meeting to approve their own version of a VCP.

Now my own reading of the two makes me think they are quite different from each other and that Scapa’s is a lot less onerous on shareholders. For starters, the plan is based on share price performance and the hurdle prices are more challenging to attain, being £3.00 after three years or £4.00 after 5 years. Secondly the awards are capped at a much lower level (5% of the value created between £1.95 starting price and £5.00 capped price).

However, tempering that is that this plan replaces a scheme that ran from 2010-2015. That plan’s starting price was 16p and the first target price was £1.00 after three years or £1.50 after 5 years, so even more challenging. Also, those awards were in cash, 12 months basic salary for achieving £1.00 or 24 months basic salary for achieving £1.50, so not nearly so generous.

So whilst I think this is not nearly as bad as Vislink, it represents a step-up in incentive awards whilst at the same time lowering the bar for achieving them, which I’m not 100% comfortable with. But I’d like others thoughts if any of you have them?

Regards,

Simon.

bobo

I'd think JDW who famously manage their staff in-efficiently would benefit by a bit of competence, the area where costs are really going to hurt are nursing homes.

peterthegreat

Hi Paul,
I would agree with most of the above but disagree that the management should be put under any pressure to use the cash for larger acquisitions. I actually like companies with inefficient balance sheets if this means they accumulate cash because of a conservative management style. I like the safety margin this creates, even if this reduces growth potential, particularly if the company is doing OK anyway. Whilst I hope that Tracsis succeeds in the US, this is a fundamentally different market for Tracsis and the answer may be that the market is not attractive for the company.
Regards,
John

casapinos

http://www.nytimes.com/2015/11/04/us/a-railroad-safety-technology-was-available-decades-ago.html?emc=edit_th_20151104&nl=todaysheadlines&nlid=72388718

See this article from NYT could you ask Tracsis what implications it has , if any to their ambitions in US?

tia

rmillaree

Ref JDW

I have been waiting forever to buy back in at the right price (i last sold at 379p doh) and did so today, one of the few proper companies around where i can sample the products, goods and services the provide and feel confident they will still be there in 20 years providing a very similar level of services.

imants

Re: TRCS.....like others i really think digging into US opportunity is crucial and i was disappointed we didn't get more colour in the results today (i.e. are they beginning to deemphasise the opportunity?)

who is their sales partner? (pedigree/size). What is motivation for the railroad (i.e. what is return on investment... Are mandates in place/likely to require RCM?

To what extent is Positive Train Control (PTC) mandated investment deferring focus and attention of railroads, who are are all having a tough time of it at the moment (have a look at charts for UNP, KSU, CSX etc)

In the UK - what to expect from Shaw Report (to assess role of Network Rail). opportunity or threat?

Thanks Paul.

Small Cap Value Report (4 Nov 2015) - TRCS, JDW, FEVR

Tracsis (LON:TRCS)

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Paul Scott

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