Small Cap Value Report (Fri 16 Nov 2018) - TRAK, EYE

16th Nov '18 by Paul Scott

42 comments 11072 reads

Good morning!

Obviously the political situation is taking centre stage at the moment. This has been such a long-running saga, that the stock market seems to have priced-in political uncertainty.

How do I see politics affecting the stock market? The chance of a Corbyn Government (a far bigger risk to company earnings than Brexit, in my opinion) still seems very remote, thanks to the fixed term rules. So a Government apparently no longer has to call a general election, even if it loses a no confidence vote.

Nobody seems to like Mrs May's deal. So what happens next? She seems to have an extraordinary ability to stagger on, regardless of anything that's thrown at her. That would be a great plus, if she were actually competent. Having an incompetent, but extraordinarily stubborn & tenacious PM, is surely the worst of both worlds.

Conspiracy theories, suggesting that we're being manipulated into abandoning Brexit, are looking more credible by the day.

The way I look at it, is that chaos is the new normal. We just have to live with it, and share prices have already discounted the uncertainty.

Trakm8 Holdings (LON:TRAK)

Share price: 22.5p (down 65% today, at 13:45)
No. shares: 36.0m
Market cap: £8.1m

Half year results & trading update

Trakm8 is a UK based technology leader in fleet management, insurance telematics, connected car, and optimisation.

Awful results today, have clobbered the share price. Bad luck to shareholders here.

H1 was heavily loss-making, and I think the big issue is now whether the company can survive, given that debt has risen sharply?

I've highlighted the items below which concern me the most;

Various reasons are given for the poor performance - see RNS if you're interested.

Outlook - the dreaded H2 weighting strikes again;

Since the Group's trading update announced in September 2018 it has become clear that the improved H2 financial performance, driven by continued growth in the telematics business, will not materialise as the Group anticipated.

Continuing delays in decisions by customers is preventing the return to the usual levels of success in Fleet and Optimisation, a move to a rental model in the automotive space, and the loss, due to sanctions, of a multi-million-pound contract for the supply of…

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IGotPoesJacket

16th Nov '18

Some kid had a sticker in the back window of their Corsa last night - "I hate this black box more than you hate how slow it's making me drive".

Made me chuckle.

I do know a middle aged guy who, on getting 9 points, chose to have a black box fitted and regularly reads his driving report. Don't know if they can normalise this behaviour, needs a lot of marketing...

timarr

There is a difference between a party having a vote of no confidence in their leader and the House of Commons having a no confidence vote in the government.

Agreed. Paul's comment, and my response, was on the government losing a no confidence vote, not the PM, which is entirely a matter for the Tories. Also the Conservatives can't call an election unilaterally, they need two thirds of MPs to agree, that was a change made under the Fixed Term Act.

I think you're wrong on the numbers. Note that they don't add up if you look at the standard sites because there are 2 Tory, 5 Labour and one DUP MP's listed as Independent for various reasons. They all vote along party lines most of the time.

There are 650 seats and Sinn Fein don't take up their seats so there are 643 sitting MPs - and, therefore, 322 votes are required to win if all MPs vote. The Tories have 317 seats and would therefore lose.

If the DUP abstain, rather than vote, then there are 633 votes on offer, 317 are required to win and the Tories would therefore win.

Note that the Speaker doesn't vote unless there's a tie when, by convention, he's expected to favour the status quo.

In addition the Tory Craig Mackinlay is on trial for filing false expenditure claims and Labour's Fiona Onasanya is on trial for perverting the course of justice. If either are found guilty they'll have to resign.

At the margins every vote counts and sheer circumstances can cause accidents. The last time a sitting government fell on a vote of confidence was in 1979 when the then Prime Minister, Jim Callaghan, decided he wasn't prepared to allow the gravely ill Labour MP Alfred Broughton to travel from hospital to vote even though he was willing to do so. Broughton died shortly after.

In the event of a no confidence vote expect it to get nasty. The last time voting was really close - on the EU withdrawal bill - the Tory whips broke pairing rules and forced ill and heavily pregnant Labour MPs into the House to vote. It's unlikely to be forgotten if the Tories need a favour next time round.

davetparkes

remember GLOBO ?

Aislabie

I may be in the deep minority here but I am impressed that Ms May has kept her nerve and worked tirelessly to square an impossible circle. We have voted out but that had decision no structure it is ridiculous (nor within our interest) to just leave without an agreement.
Lets take a tiny example; there is a very convenient arrangement currently, which in the event of your illness in Europe, allows your NHS cover to pay for local help. We can reject this or ignore this in which case it fails, or add it to the vast list of things that need to be covered by a new agreement, There is no requirement for Europe to continue this, they might just find it easier to ignore it. But it is in our interest (and not necessarily theirs) to come to an agreement. (I do not know if these is even part of the agreement but I hope you get the example).
Multiply all these tiny areas of agreement and getting a new set of agreements is both hard and necessary and I don't see a flag waving Boris or Jacob R-M putting the work tin o resolve these problems. So my thanks go to Mrs May for the continuing effort

wildshot

Well said. Love or hate Mrs May (and I've never been keen on her) she has taken on Mission Impossible. Brexit was always going to be a farce because no matter what was agreed, a lot of people would be upset. Remain - had one definition and was clearly understood. Leave - has thousands of personal interpretations which is why no matter what the Brexit deal will be a lot of Leavers will be upset about the deal.

gbjbaanb

There is zero chance the DUP will abstain rather than vote down anything they see makes NI less of a part of the UK, so they will never let the current deal ()that appears to align Ni with Irish/EU regulations more than UK ones) get the slightest chance of success.

PS the Tories didn't break pairing rules, there was only 1 pair available, so Labour MP Cat Smith was given the pairing, the others then had the choice to come in or not - and came in. What was dodgy is that they usually let MPs like that vote without having to come in in person. Its still an example of how hopeless May and her whips are. Don't give a damn about the MPs welfare, or the electorate's decision to leave, or I'd say, anything else that isn't exactly what they want.

Gromley

17th Nov '18

I must confess that I had never looked at Eagle Eye Solutions (LON:EYE) before, but reading Paul’s write up couldn’t help but think to myself, “this is going to be a sucker stock surely”.

An lo and behold, when I looked , it is.

This is not to automatically demean it as a potential investment some story/sucker stocks do come good, but so few that you really are looking for a needle in a haystack trying to find them.

Purely on the factors Eagle Eye Solutions (LON:EYE) is far from the worst sucker stock you will ever see.

Quality and Momentum are actually not that bad.

The Quality Rank is held up by the high Gross Profits to assets

As a “software company” though it should have virtually no COGS so it is not hard for this ratio not to look positive; especially if the company has very little by way of assets. The rest of the components of the quality factor are pretty poor, to be expected as it has yet to generate profits or cash.

The Momentum Rank again is held up by a single component, this case “scaled earnings surprise”, ie they have overachieved against market expectations in the past. This is potentially more positive in my view, but as they are now only “in line” then that may not be a pervading measure.

Value Rank is poor as we might expect for a company yet to make any profits. However, the Price to Book ratio is also significantly adverse at 5.19x. Bear in mind that I believe this ratio operates off Book value (NAV) rather than Tangible Book Value (TNAV) and that at the last count (June-18) of the NAV of £6.4m, Intangibles were £5.5m.

In reality therefore were are looking at a Price to Tangible book value of an eye-watering 37x. They would surely need a massive moat to justify that and I just don’t see it.

From what (very little to be fair) I have read, it does not sound to me that there offering is especially novel or hard to reproduce.

In fairness though I could say that neither was PayPal’s offering especially clever, but they still achieved massive market strength.

I’m not sure if Paul routinely reads ‘after the event’ comments on the threads, but if you are looking in Paul; I would be really interested to hear what you see that I do not – I know that in the past you have often seen potential that has escaped me, but in this case I’m struggling to see it as anything other than a ‘dog’.

Paul does in fairness highlight whether they have the cash to get through to profitability and questions whether they should be taking on debt at this stage. Looking again at the accounts they burned through £3.3m of cash in the year to June 18 and were therefore left with net cash of £0.4m and headroom including their debt facilities of £5.4m.

The fact that there June numbers feature c. £1.5m of Gross cash and £1.1m of Gross debt suggests to me some complexity in their accounts and that the current “headroom” amounts to little more than a year unless they achieve a material improvement in cash generation.

I love that the SCVR often causes me to take a look at stocks that otherwise might not hit my radar and this has been a fascinating one just to take a high level view of. I will definitely be looking out to see how it does (if I don't add it to my shortfolio first) but if I have missed an obvious attraction here I would always welcome additional input.

gus 1065

Hi Aislabie.

I appreciate Stocko is not a forum for political comment, but agree with your sentiments. Likewise, I’ve no strong pro or anti Brexit position (I voted to remain but will accept the majority decision to leave) but having started out on the journey feel it has to be in everyone’s interests to get to the end of it.

The post Euro membership referendum role of PM was always going to be a poisoned chalice (why do you think David Cameron exited stage left ASAP?) yet so far Ms May has not succumbed to the Hemlock. Coupled with the failed attempt to get a workable (i.e. non DUP dependent) majority in the Commons in last year’s election, she’s in a pretty near impossible position of trying to build a consensus where none exists. Add to the mix a combination of external political opportunism from the other parties that will benefit from the Tories tearing themselves apart and the internal fractures from the likes of Jacob R-M (perhaps on principle) and Boris J. flip-flopping his position for his own long term leadership ambitions like he’s in some some Oxford Union debate chamber and there’s a sad inevitability about the current mess.

Whatever Faustian pact May has had to enter into with Gove and Fox to keep them in the Cabinet will play out over the coming weeks and months but to date all credit to Ms May for showing more cojones than the rest of the chinless wonders in Westminster put together. I suspect it will cost her her premiership (perhaps as soon as next week) and just hope it doesn’t cost her her health, but of all the players on the stage she seems the only one prepared to roll up her sleeves and try to do what’s required to get the job done.

Gus.

This constitutional stuff is getting a bit off topic, but I suppose it's the weekend ...

Agreed. Back in the old days if the Brexit Bill had failed we'd probably (*) have had a General Election, as it would have constituted a vote of no confidence. Now you have to have a separate no confidence vote so the DUP could vote against the government on Brexit but for them on a confidence bill.

On the pairing thing the Tories did break pairing rules. Brandon Lewis was paired with Jo Swinson, didn't vote for most of the day, but then did on the critical amendments.

For what it's worth I don't think the deal is an attempt to undermine Brexit, it's just the best our bunch of hapless politicians and negotiators can produce in the time available. The overwhelming impression is that our leaders aren't really used to managing change and really don't know what they're doing.

Just in the past few weeks we've had Raab discovering that 17% of our imports come through Calais (note, Dominic, more come through Rotterdam), Bradley uncovering the astonishing fact that NI citizens religiously vote along Unionist / Republican lines and Caroline Nokes explaining to a bemused Home Affairs committee that the app to allow EU citizens to apply for permanent residence doesn't work on iPhones (**). Before that David Davis hardly ever visited Brussels, let alone negotiated, and Boris Johnson's main contribution to foreign affairs was to condemn poor Nazanin Zaghari-Ratcliffe to an extended time in an Iranian prison.

Oh, and the arch-Brexiteer MP Andrew Bridgen apparently thinks that all UK citizens automatically qualify for Irish passports (do go find this on the RTE website, it's comedy gold).

(*) "Probably" because our constitution is actually held together by tradition and sticky-backed plastic. It's malleable, which is one reason it's survived so long.

(**) The official advice is to "borrow a friend's Android phone". Nokes blamed Apple but this is functionality we've wanted Apple to enable for 5 years or more. They haven't for their own business reasons so the likelihood of them changing this globally just for the UK government was always vanishingly small. Heaven knows how much this has cost, they've employed no less than 6 consultancy firms to design the solution. Thank goodness we don't have to rely on technology in other areas to deliver a smooth Brexit.

peterg

Since it's the weekend ....

On the NI and the Union question, the irony is that the single thing that would most accelerate moves towards the NI leaving the Union would be a hard Irish/NI border. There's no chance of NI voting for Irish unification at present as there are plenty of catholics who are quite happy with things as they are. Undermine the economic links with the republic and inhibit free trade, and that would be likely to change - and quite likely not only amongst catholics. With a hard border NI would be a remote outpost on the fringes of the UK (as it was in the past, pre EU and the Good Friday agreement) with a failing economy.
The DUP represent a minority of a province that voted strongly for remain and the thing that would do most to preserve the Union, both with NI and Scotland would be to stay in the EU.

I'll agree the deal is hapless politicians being even more useless than before. But have you read the Spectator's story about it?

Apart from the usual points on giving up sovereignty for decades, there's 2 interesting extras sneaked in there:

1. No former or current MEP or EU employee will have their salary or pension taxed.
2. No MEP or employee who has criminal charges brought against them can be prosecuted.

https://blogs.spectator.co.uk/2018/11/the-top-40-horrors-lurking-in-the-small-print-of-theresa-mays-brexit-deal/

18th Nov '18

I'll agree the deal is hapless politicians being even more useless than before. But have you read the Spectator's story about it?

Generally it's a pretty hopeless article - most of the points being made are the kind of errors laypeople make when substituting legal exactitude with commonsense. For instance:

The UK is shut out of all EU networks and databases for security – yet no such provision exists to shut the EU out of ours. (Article 8)

Well duh. Are we going to enshrine UK Law in an EU treaty? Isn't regaining sovereignty the point?

Once we leave we decide what access we give the EU. The article is full of such substitution confusion, along with an array of statements that seem to confuse the transition / implementation period with the final divorce.

On the two specific points about taxation and criminal charges: this is about maintaining the rights accrued to people while we were in the EU. If people earned money and were told at the time they wouldn't be taxed on it or performed services and were told at the time they were immune from prosecution then those rights are protected under the withdrawal agreement. It's a basic tenant of any legal system that people shouldn't be taxed retrospectively or prosecuted on the basis of laws that weren't in force at the time of the offence.

And on this:

The GDPR clause. The General Data Protection Regulation – the EU’s stupidest law ever? – is to be bound into UK law (Articles 71 to 73). There had been an expectation in some quarters that the UK could get out of it.

Well, firstly this applies for the implementation period only anyway, but second if we arbitrarily withdrew from this every single company in the UK that hosts EU data would have to leave - and that's a lot of companies. And as for useless - frankly, it's the best thing the EU has ever done for us.

Anyway, as with any report, on either side, we need to look at the source. In this case the Spectator is owned by the tax exile Barclay brothers, who also own the Telegraph. And, of course, among its former editors it counts one B. Johnson. Probably not the most unbiased source of data.

But in the end, everyone has to make their own mind up. Rather than reading ideologically inspired op-eds I invite everyone to read the actual text themselves and make up their own minds:

https://ec.europa.eu/commissio...

dodge1664

Unfortunately this thread has to be mainly about politics, as that is the main force driving share prices at the moment. I find the current, unprecedented situation very hard to call, but some things seem clear:
1. There isn't Parliamentary support for May's deal, or for no deal.
2. The EU is set against renegotiation, apart from a little polishing of May's deal/turd perhaps.
3. The Tories really, really don't want a General Election at the moment.
Some possible outcomes after the deal has been rejected
1. Norway style deal
2. a second referendum
3. MPs are so scared by the market reaction to the deal being rejected that they approve it the second time around

Hi dodge

I've just finished reading the damn thing, or at least skimming it ... the big issue for me is the transition period - we end up taking EU laws but not having any say, and paying for the privilege. At the end of the process, if everything works as expected, we do end up with a proper Brexit, but there's all sorts of issues to overcome to get there. And the backstop veto, while understandable, is a threat hanging over any future trade deal.

The only conclusion I can draw is that the government thinks that without such a grace period we don't have the resources or institutions to function as an independent nation. After 50 years of integration with the EU that's probably not entirely surprising, but deeply worrying.

Personally I think the Tories should hold off on a leadership challenge, let the Brexit Bill fail and then depose May. If she wins a leadership vote before that she can't be challenged for a year, and she's stubborn enough to try and ride it out. Although I can't believe I'm saying this, I think the best thing for the country is to put the Brexiteers in charge - at least then, if they fail, there'll be less excuses, although they'd obviously blame everyone but themselves (witness Raab's statement today).

On a personal note my conclusion from this is that Project Fear is probably more real than I'd thought, and I'll be addressing that by adjusting my asset allocations over the next few weeks.

However, the sun is shining and we won the cricket. There are always reasons to be cheerful, whatever the political weather.

TStubbs

19th Nov '18

Did we give up with the Game Digital report or have I just missed it? T

mojomogoz

BREXIT!!!!

If May gets the withdrawal agreement to parliament it will pass. The last few days have been a great example of what happens when the hot water boils over...everyone has gone a bit off the chain and mental...they could not contain their inner angst and had to give expression to it.

We are now in the cooling down phase. It is irrelevant whether 48 Tories vote for a leadership challenge. It will just be part of the general theatre.

WA passes as when it gets right down to the yes-no decision (with the EU in the background bluffing take it or leave it) party loyalty and whipping goes out the window...it may be that May makes it a free vote as that actually liberates support.

Whether you are remain or Brexit, soft or hard in your disposition, the best thing for UK to do now is pass May's WA. By all means try and adjust the sovereignty interfering backstop if possible before then...and a bit of heat and drama might help it move as the EU has shown some panic at this late stage. Emotionally I think May may have the upper hand at this point as they know the outcome they want is very dependent on her and they must help her stay in the game. Even if the EU wants to win the UK back into the club it knows it cannot risk that play right now. It needs WA signed and then in the implementation period re-marriage can be played for.

Passing WA back then bats it back to the EU. Here's what no-one in UK has got round to thinking about (I suspect maybe apart from the diligent May)...all EU 27 need to agree on it. That is not trivial. There's a high chance of some gamesmanship from Italy, Poland and perhaps the Visegard nations generally. Who's to say that Italy doesn't just link it to their budget and immigration beefs. This is the UK's great hope of actually being able to apply some leverage and from the moral high ground of 'well we held up our end of the deal'.

Personally, I don't like the deal and I voted for Brexit. I would prefer a 'hard' brexit to what is on the table. There will be pain from this as it is a shock to the system but the projections re permanent damage are bad economics and forecasting. A model that only predicts bad outcomes is a bad model...unless we are talking a systemic failure of some sort. If you believe brexit causes isolated UK systemic failure then you've got a lot of explaining to do.

The risk to the UK will be if global capital markets close to it. If they remain open then the UK can finance stress and gaps that come from brexit. It would be akin to an act of war if our neighbours in the EU sought to isolate us as punishment. They will not do this, as its a preposterous position for them to pursue.

mojoword out ;)

There will be pain from this as it is a shock to the system but the projections re permanent damage are bad economics and forecasting. A model that only predicts bad outcomes is a bad model...

I'm sure that's a very comforting thought if you are promoting a hard Brexit, but that doesn't stop it being meaningless rubbish. You are effectively saying no major change can cause permanent damage, since otherwise faced with any hypothetical change no "good" model can predict that any change can lead to a bad outcome!

Hey Peter, you've got me banged to rights...I'm a raving loon...but just since you are here...

I copy and paste the below to illustrate that meaningless rubbish is the topic raised by Peter:

"I'm sure that's a very comforting thought if you are promoting a hard Brexit, but that doesn't stop it being meaningless rubbish."

I now copy and paste an example of meaningless rubbish by Peter as its both jibberish and misrepresenting what I said to assert his superiority...

"You are effectively saying no major change can cause permanent damage, since otherwise faced with any hypothetical change no "good" model can predict that any change can lead to a bad outcome!"

Eh, didn't say that. You too seem to suffer from economic illiteracy and a peculiar lack of appreciation of economic history. I'd explain...but its probably lost on you.

Please specify what in brexit causes systemic permanent damage to UK economic potential. Be specific rather than general and explain how the causal factor extrapolates forever more. There are things that could arise around Brexit to cause this but curious to hear it from you since you are so cuttingly dismissive and confident of your own view.

And, just to keep it factual, I did not promote a hard brexit above or at other times. I voted brexit after reflection and analysis. My starting point was assuming I would vote remain as I have always been a soft EUropean (although how the PIIGS were handled was super stupid and, in the case of Greece, irrational and immoral given they had been accepted into the shared mission).

Give me genuine fiscal integration within a federal European wide structure and I'd quite likely vote to join the euro.

-1

Well, the first post WA draft kerboom is Spanish..."Spain demands Gibraltar Veto in Brexit Deal":

https://www.bbc.co.uk/news/world-europe-46267684

The Irish issue is real. The British may have been negligent in caring about it enough around the referendum but since then the EU with somewhat shortsighted Irish support have played it a bit ugly. it should always been a solution sought in a final deal and never a tool for leverage in pre-deal negotiations and in the WA.

Now the door is open for others to seek leverage and something they want. Spain's first to apply the ratchet.

What if the 27 don't agree to the deal Barnier negotiated? Undoubtedly the Italian govt will play to form and claim that Italian needs should be better considered in some way. And their recent form is that they will not agree unless they get exactly what they want "in the national interest".

The mess is coming...the best thing the UK can do, whether you are remain or leave, is pass this potato back to the EU to see if they drop at this point.

It's a high stakes game and we need to play for the high ground and the leverage it provides. The EU is showing cracks and May is looking stronger. Hopefully May sees this and can stay the course for the moment despite the pressure.

20th Nov '18

Now the door is open for others to seek leverage and something they want. Spain's first to apply the ratchet.

Not exactly. The UK and Spain have conducted separate talks over Gibraltar throughout the Withdrawal Agreement negotiations. Spain want it to be clear that that status will continue, but the WA is ambiguous.

https://elpais.com/elpais/2018...

The Irish border discussion can't wait for a final deal. The UK wants to close its borders against the EU next March, so the status of an open border with Ireland has to be sorted now. If the UK was willing to tolerate freedom of movement during the transition period then the negotiation could be pushed out.

Small Cap Value Report (Fri 16 Nov 2018) - TRAK, EYE

Trakm8 Holdings (LON:TRAK)

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Paul Scott

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