Small Cap Value Report (4 Jul 2016) - TRAK, PLA

4th Jul '16 by Paul Scott

26 comments 19112 reads

Good morning!

The US market is shut today, so that usually means a slower day in the UK.

It's worth noting again the considerable disconnect between the FTSE 100 and small to mid caps. Its high dollar earnings means that the FTSE 100 has been remarkably strong recently - because once translated into sterling, those dollar earnings have of course gone up significantly, due to the recent weakness of sterling, caused by Brexit.

At the time of writing, FTSE 100 is down 0.15% today, whilst the mid caps index is down 1.5%. If you're a small cap investor, and you benchmark (or hedge) yourself against FTSE 100, then you're using the wrong index!

Corporation Tax

There has been a very important announcement from George Osborne, saying that he intends to keep reducing Corporation Tax to below 15% in due course. This is on top of existing reductions of 1% p.a.

This is clearly a positive development, and necessary, since companies need to be persuaded to remain in the UK, and continue inward investment. Having a super-competitive tax regime is likely to achieve that aim.

Obviously it will go down like a lead balloon on the continent, as a beggar-thy-neighbour policy, but there we go.

The annual reduction in corporation tax will of course give us, as investors, a gentle tailwind. Since earnings are after-tax profits, then the lower tax rate will be a gentle boost to earnings each year, for companies with UK earnings. That's helpful in the current circumstances.

Trakm8 Holdings (LON:TRAK)

Share price: 255p (up 8.5% today)
No. shares: 32.3m
Market cap: £82.4m

Results y/e 31 Mar 2016 & contract win - for the avoidance of doubt, I don't currently hold this share, but am mulling whether to buy back in or not. The headline figures today look really good, and have benefited from 2 acquisitions in the year - both of which have been profitable so far.

Adjusted EPS comes out at 13.44p, up an impressive 115% on last year. Although note that this is flattered by a negative tax charge. The rest of the results are self-explanatory, so I won't regurgitate that here.

It probably adds more value if I outline the Q&A session that I had with the Chairman & FD this morning, to answer my particular queries on the results statement. Call me old fashioned, but personally if I have queries…

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TamzinPiworld

4th Jul '16

Many thanks Paul for the great detailed explanation of the Trakm8 Holdings (LON:TRAK) accounts - very helpful.

We filmed John Watkins, CEO with a quick presentation, talking through the results, this morning. I'll post here when the edit's finished.

Tamzin (piworld.co.uk)

Flackwell

Of course he can - its been done throughout the coalition and current parliaments

Or are you asking if he'll be in the job to effect what he says - in which case you're right - he won't be able to cut it

Rusty2

I was referring to that article, yes he probably can. I'm concerned that with 25% tax cuts to large companies how are we going to repay it. Seems a bit excessive to me.

Ramridge

Re. Trakm8 Holdings (LON:TRAK)
I had a good look at the report this morning and I largely agree with your conclusions. A few points of detail.

1. The adjusted diluted eps is 12.38 (Note 7)

2. The segmented analysis (Note 3) shows that the UK represents over 97% of total sales. So nearly all of additional costs of purchasing components due to a weakening sterling will need to be absorbed and will hit margins. Yes export sales might rise but for the near term that is likely to be marginal.

3. On today's sp, PE is near 20. This is on the rich side IMO, given the uncertain times ahead.

(No position)

Herbie - As far as I am aware, there are no EU rules concerning direct taxes, such as corporation tax. The UK government (or any member state) can set whatever corporation tax rate it sees fit.
Could be wrong,

pj8

Ramridge
My understanding is that you are correct. Ireland had low corporation tax until they needed help in the financial crisis and the anomaly became an issue. The EU in fact suggested unifying corporate tax across all its members, but the UK objected. The UK then complained when other countries undercut them with lower corporate tax - all a bit bizarre, really. A race to the bottom on corporate tax could prove a pyrrhic victory if other countries choose to cut more - but then as others have said, it's all academic: Osborne is unlikely to be around long enough as Chancellor to deliver on this or anything else he says at the moment.

Here's the link to Trakm8 Holdings (LON:TRAK) CEO John Watkins discussing FY results, acquisitions and Brexit.

http://www.piworld.co.uk/videos/2016/7/4/trakm8-trak-fy-results-31316

biloseli

I discussed this with a Chartered Tax Advisor a few days ago. As far as she's aware, EU countries are free to set their corporation tax rates as they wish. Ireland's is (or was, last time I looked) very low, and I believe some EU countries have complained about it.

Ken Lowes

Herbie
Look at the tax cut another way, attract companies who employ lots of people who pay lots of tax and NI. Or do nothing and see profits and employment fall thus leading to huge tax revenue reduction and corporate failure. Which would you do, or is it a no brainier ?

Well a 25% tax cut is a lot you will have to attract or not lose a lot of companies to make that up. Will have to wait and see.

JohnEustace

A lot of business done by the likes of Microsoft and Apple etc. that are really UK sales currently gets booked in Ireland or Luxembourg to take advantage of their low corporation tax. Presumably when we are out of the EU that business will have to be booked and taxed here, generating more revenue for HMRC.
As to the correct rate of corporation tax, that depends on your views on the Laffer curve and where we sit on it. Simplistically, if you tax something at 100% you will get nothing because people will stop doing it. Similarly a 0% tax raises nothing. Somewhere between is the optimum rate that raises the most revenue. In a competitive environment such as corporation tax for multi-nationals it's very difficult to model what that optimum rate is but a lower tax will definitely attract and retain more companies to pay their taxes here so it's not as simple as saying a lower tax rate automatically means less revenue.

dmjram

There is nothing that suggests post EU exit Google, Amazon etc will pay more corporation tax in the UK. Corporation tax is not an EU competence. Apple also pays very little tax in the US - it is the set up of national tax systems and the ability of large corporates to game them that led us to where we are with this. not the EU.

jonesj

Now that is one of the 2 biggest problems with western democracy. The majority of governments lack the responsibility & morality to balance the books.
As that is the case, what we need is a constitutional requirement to run a balanced budget over every rolling 5 year period so and an independent body to call the governments to account. After his appalling performance, Gordon Brown & his fellow MPs should have their pension docked by about 90%. George Osborne should have already earned a cut.

ISAallowance

I'm don't know whether cutting companies tax bills is the right course or not, but if we are going to go that route I'd much rather see employers NI cut than corporation tax. Seems to me it has the dual advantage of being naturally focussed at businesses that provide the most UK employment, and also being less blatantly beggar-thy-neighbour than a corporation tax cut.

Tortoise investor

Just to flag to readers: over the weekend I researched Kainos (LON:KNOS) which another reader and Paul have flagged recently when it was around 200p. It has been hit following Brexit and is now 136p, I assume because of a combination of shareholders buying on the story and then being annoyed by a large decline in the SP over the last few months and perhaps also because it has a large Polish office - although it looks like less than 10% of its revenue is from the EU so I don't see Brexit having a major impact. Its operating profit has doubled in two years, has a gross margin of 53.4%, cash balance represents 10% of market cap, and yet is currently trading on a P/E of 13 based on results for year ended 31 March 2016. I'm biased in flagging this as I just bought it today but I think it looks very promising at the current share price. DYOR.

Colins2

5th Jul '16

Nice presentation.

shanklin100

Paul

On a separate tack, your Tweet yesterday evening makes a good point...

"Surely the very poor weather in most of June would have been a big contributory factor in the poor construction figures today?"

Cheers, Martin

Trident

Microsoft have announced they will paying Corp Tax in some local jurisdictions, which will include the UK. So perhaps winding back some of its traditional allocation of revenues generated in UK to Eire.

DJLJ23

8th Jul '16

On 23 June 2016, Trakm8 Holdings (LON:TRAK) stated "the Company intends to take advantage of the following disclosure exemptions from the requirements of International Financial Reporting Standards (IFRS) in accordance with FRS 101." Some of the things they appear to be exempting seem quite important to me, 10d statement of cash flow, • Paragraph 17 of IAS 24, 'Related party disclosures (key management compensation)

• The requirements of IAS 24, 'Related party disclosures' to disclose related party transactions entered into between two or more members of a group

there are quite a lot more areas covered by the RNS, not being an accountant I wonder why they have done this, and should, as a potential investor, I be concerned ?

rhomboid1

I agree , I'm not a holder but if I was I'd be keen to get a response from the company as to their rationale.

Small Cap Value Report (4 Jul 2016) - TRAK, PLA

Corporation Tax

Trakm8 Holdings (LON:TRAK)

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Paul Scott

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