Small Cap Value Report (Mon 8 July 2019) - TRAK, XAR, ATQT, FST

8th Jul '19 by Graham Neary

29 comments 6936 reads

Morning folks,

The assortment of updates today looks like this:

Trakm8 Holdings (LON:TRAK) - final results (shares down 18%)
Xaar (LON:XAR) - trading statement ( shares up 5%)
ATTRAQT (LON:ATQT) - trading update
Frontier Smart Technologies (LON:FST) - statement by Science (LON:SAG) on 35p bid

Trakm8 Holdings (LON:TRAK)

Share price: 18.5p (-18%)
No. of shares: 50 million
Market cap: £9 million

Trakm8 Holdings plc (AIM: TRAK), the global telematics and data insight provider, announces its final results for the year ended 31 March 2019 (FY-2019).

I've never invested in Trakm8 Holdings (LON:TRAK) or in the "good" telematics company, Quartix Holdings (LON:QTX). But I've analysed both of them in some detail before - see my review of Trakm8's results last year, when the share price was 94p.

Trakm8 shares once enjoyed an enormous valuation, at 400p. But the reality of poor cash generation and volatile performance has squeezed the life out of the shares. It is now below our £10 million market cap requirement for coverage, so this could be the last time I look at it.

Today's results are predictably bad: everything is going the wrong way. The company is loss-making and net debt has increased to £5.6 million.

What's gone wrong?

"Sales related challenges and contract delays" - the products aren't required urgently enough by customers, in other words.

Outlook

Trakm8 is looking for a low double digit (i.e. 10%-12%) increase in revenue and "small adjusted profitability" in the current financial year.

It again says that great things are expected in the second half of the year.

FY 2020 is "more significantly second half loaded than ideal", due to the launch of the AA Smart Breakdown service and some contract wins.

Jam is always just around the corner! Investors should note that H2 last year produced no jam, despite the company's expectations.

The Chairman acknowledges that previous expectations were set too high, and promises that things will be different this time around:

Given the disappointing failure to predict the outcome…

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hayashi22

8th Jul '19

Became so disillusioned with IPOs such as £Luceco and UP Global Sourcing Holdings (LON:UPGS) that abandoned them altogether. Sure enough managed to miss a good one ..AJ Bell.

JohnEustace

I commented on IAG's IT being in a poor state back in June 2017 when they turned up in Roland Head's screen. What I didn't think it responsible to say at the time was that the mess revealed by their various systems failures just screamed out that they were a wide open high profile target for hackers. I'm not at all surprised that some hackers worked that out for themselves.

The size of the ICO fine reflects their view of the appropriateness or otherwise of the measures that IAG had in place to protect the personal data they held, as well as their failure to report the breach within the required timescales.

https://www.stockopedia.com/content/is-international-consolidated-airlines-heading-for-a-crash-landing-196495/

Trident

I think for large consumer bodies the obvious risks are are in their engagement systems.

However, it is not hard to see all normal electronic communications systems as a basis for cock ups, and I see a growing encumbrance to business if the necessary processes override commercial convenience. That may just become a factor of life, barring some unforseen technical revolution.

At a high level, many ordinary businesses and suppliers do not seem to be aware of the requirements on them. And its a game of pass the legal parcel for many large corporations, that is proving a time consuming process for contractual engagements.

The fact that the decision on Morrison's at the appeal stage, shows us that the finger is already tilting the justice scales, and I am not convinced that Treasury budget dance, and Regulator adjustments of fines will have no connection.

With respect I think you are simplifying an increasing burdensome body of regulation. That it has some good outcomes, I don't doubt. I am afraid we'll have to agree to disagree on that one for the time being on the uncertainty it brings to business life.

Justmo

Trident,

Maybe you haven't had your details compromised through the apathetic nature of some of these companies. Lucky you. I can assure you it's not very nice waking up to find your details on the internet because companies haven't bothered to protect your details, and then the company often refuses to remove your details from their database unless you send them even more personal details.

Some people have incurred huge financial loss together with constant threats, email spoofs, and so on.

If there is no fine in place then companies can continue to be lax.

FREng

The underlying reasion for IT failures and cybersecurity vulnerabilities is the poor quality of most software development. Much software is built using components taken from internet sites, with little documentation and no warranties. Developers rely on being able to find errors through testing, when academics and some software engineers have known (and shown decades ago) that even heroic and impractical amounts of testing cannot find most defects in today's complex IT systems.

This situation can only get worse unless there is a revolution that introduces rigorous engineering disciplines into the way software is developed. GDPR and other regulation (such as HSE's new Operational Guidance for the inspectors that regulate high hazard industries) may cause companies to invest in better quality I. If so, it will be to everyone's benefit.

Justmo

Maybe that is true. As I say, I do not exclude blatant negligence from criticism, especially from companies with the budgets and expertise at hand.

There is Catch 22 to all regulatory processes. For example to prove my id for many banking and legal purposes, I have to send passport/driving licence and utility bill info to a whole variety of bodies. In that process, I am already putting myself at risk, to prevent risk, on the basis that these won't be abused accidently or otherwise.

My sympathies if you have been affected by poor processes, but there is a lot of consequences for a regulatory process that in my view has created a great deal of uncertainty and perhaps feeds on itself.

simoan

Trakm8 continues to focus on owning the intellectual property ('IP') we use in our solutions, and we see this as one of our key competitive advantages. Telematics systems are complex; but because we own all the elements that encompass a solution (with the exception of the mobile networks) we have the ability to understand and resolve problems more easily than our competitors.

Sorry, but as an engineer I have to say this is utter garbage. The IP has clearly not differentiated the company's products at all over the years and has merely served to run down cash because of the cost of developing and maintaining it. And unfortunately the company has been part funded by the UK tax payer through the silly R&D tax credit system .

The crux of the problem is that the company has been incredibly badly managed over the years and targeted the wrong line of business without being agile enough to see the writing on the wall and change direction. Like many small UK technology companies, it should never have been listed.

All the best, Si

Graham Neary

re: Trakm8 Holdings (LON:TRAK)

Si, thanks for the input. Hopefully it doesn't wind up as a zero for holders.

I completely agree. I've been an engineer for 38 years and IMHO modern day software engineers are lazy and generally incompetent when understanding the security aspects of software design. They readily re-use third party components and libraries that have not been fully tested or are even of unknown provenance. Back in the day, software was built in-house from the ground up. Of course, the driver for the modern approach is the increasing drive to get a product to market and to keep costs as low as possible.

However, many of these attacks are caused by human engineering i.e. spear phishing. It only takes one person clicking on a malicious link to let the hackers through the front door. As long as your employees are connected to the internet there is a danger, no matter how secure your IT systems are.

This situation can only get worse unless there is a revolution that introduces rigorous engineering disciplines into the way software is developed.

Apart from a few industries that have economics that can live with the high cost involved, rigorous engineering disappeared stage left many years ago. As a rigorous engineer I can't bloody wait to retire! :-)

Mercia Technologies (LON:MERC) reported today. The figures look OK to me (though I'd welcome Graham's expert view). The outlokk from the CEO says:

We enter our current financial year having developed a strong foundation for Mercia's next chapter as a proactive, regionally focused specialist asset manager. This domestic focus in part protects us from the uncertainties of the UK's departure from the EU and the nature of its new relationship and timing. The Group has a healthy cash position with c.£168million in free cash to invest from its FuM and in addition c.£30million of unrestricted balance sheet cash to support new and existing direct investments. We remain centred on transactions typically requiring less than £10.0million in total and by leveraging the four pools of capital that we manage across the Group, Mercia remains well positioned to combine third-party funds with our own balance sheet capital, where appropriate.

mercury61

re Mercia Technologies (LON:MERC) (now called Mercia Asset Management) a note on Research tree from Edison today: ''The shares continue to trade at a significant discount to NAV (0.77x), even before considering the embedded value of Mercia Fund Managers (10p+).''

timarr

With respect I think you are simplifying an increasing burdensome body of regulation. That it has some good outcomes, I don't doubt. I am afraid we'll have to agree to disagree on that one for the time being on the uncertainty it brings to business life.

But that rather assumes that the ideal situation is one that provides certainty to business regardless of the impact on personal privacy. Having been on both sides of the GDPR fence I can attest to the fact that it's an overly bureaucratic pain in the arse, but it's also a consequence of companies failing to self-regulate.

Almost inevitably technical innovation outstrips the ability of regulators to regulate and in the meantime the innovators have the chance to make supra-normal profits. However, eventually the regulators catch-up and then businesses have a choice - regulate themselves or try to use their economic rents to lobby against the regulations in order to maintain their profits.

Almost always companies opt for the latter and almost always this eventually fails. GDPR is a consequence of this, PSD2 another. It's almost guaranteed that governments will soon regulate to capture more taxes from online companies as well. All of these things will expose online businesses to new costs and reduce their margins. It's an inevitable part of the innovation cycle.

A lot of the expectations about the profitability of online companies have been founded on the temporary excess profits that the first and second movers have achieved. That's ending - companies can't expect to continue to make lots of money without being required to take responsibility for the privacy and security of the data they hold.

Up until GDPR if something went wrong then the costs fell on consumers and banks. While the regulation has many faults it does at least push the burden back on the companies responsible for the problems. No doubt it will evolve into something more manageable over time, but the issues of managing consent and data privacy won't be going away.

Did anyone here go to the @SOLI results presentation and update on prospects at lunchtime today? If so, was anything important said?

I forecast that the same will happen in a few years time over cybersecurity vulnerabilities. It's unacceptable that companies can sell products that expose their customers to serious risks without carrying some liability for the consequences.

Currently, software companies successfully argue that regulation would suppress innovation.

In my opinion, regulation that requires higher quality usually stimulates innovation, because small companies are agile and use the opportunity to disrupt their larger competitors (which is one reason why the complacent incumbents lobby against regulation).

I haven't noticed that there is a lack of innovation in children's toys, or medical devices, for example, despite both being quite highly regulated in some aspects.

Of course, there are already cybersecurity issues with children's toys:

https://www.euractiv.com/secti...

And with medical devices:

https://www.forbes.com/sites/z...

Although this is my absolute favourite, unbelievable though it is:

https://www.wired.com/story/in...

But overall it's all part of the Internet of Things revolution. As this article quotes:

"In a relatively short time we've taken a system built to resist destruction by nuclear weapons and made it vulnerable to toasters,"

https://www.bbc.co.uk/news/tec...

ExpectingValue

This is a great comment. Fascinating perspective. Thanks.

jonesj

If I'm not mistaken, Trakm8 Holdings (LON:TRAK) were the company where the management reset their options to a lower strike price recently.
One upside of the poor company performance is no immediate prospect of them benifitting from this greed.

I don't follow the company but that may be the case. Repricing "out of the money" options is the kind of thing we've come to expect from unscrupulous AIM management teams.

The update today was particularly poor, not just because the numbers are not great, but because the directors have decided to throw one of their sales teams under the bus in public without any admission of who is driving the bus. Who employed the sales team and monitors performance? According to Stocko the company only has 240 employees and so the directors should be more hands on and deal with it rather than blaming individuals in public and reducing employee morale in the process.

I suspect Graham is correct and the intangibles (IP etc.) are worth nowhere close to what they are valued at in the accounts. It seems to me the jig is nearly up.

ACounsell

Hi Graham,

Think you may be a little unfair to describe Xaar (LON:XAR) industrial print heads as unglamorous. Having worked in the industrial ink jet business for 10 years + I can attest that there is a lot of technology that goes into industrial printhead manufacture - particularly contactless ink jet printing. The design and manufacture requires a combination of technological skills including front end and internal software design, electronics to control physics of ink delivery and chemistry to develop inks suitable for a variety of substrates. Unfortunately as a long term holder of Xaar (LON:XAR) having bought in at £5.00 after a halving from £11+ I am disappointed that they haven’t been able to translate their technology IP into market leading products as yet (!). I had hoped that as one of the few remaining independent industrial ink jet companies they might be a tempting acquisition target at the current valuation but that doesn’t seem to on the cards either. I fear I will remain disappointed!

9th Jul '19

Hi ACounsell, you are right, there is a lot of impressive technology in ink jets (and you would know this much better than me).

I was trying to say that it was an unglamorous sector as far as private investors are concerned - I don't think the average investor can relate to Xaar or find the motivation to study printheads. But I should have phrased it differently!

Also I can see where you were coming from in terms of the takeover possibility. It's something that I too think is possible but I've been waiting for the turnaround to work, before dipping my toe in. You were early to the party, but I will probably be late.

Small Cap Value Report (Mon 8 July 2019) - TRAK, XAR, ATQT, FST

Trakm8 Holdings (LON:TRAK)

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Graham Neary

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