Small Cap Value Report (Thu 8 Nov 2018) - placeholder

Thursday, Nov 08 2018 by
47

Good afternoon, it's Paul here.

Here is the usual placeholder for your comments.

Unfortunately, I overslept today, due to getting my life/work balance into imbalance last night - that's code for getting raucously drunk with an old friend who popped over from LA, and then ending up in Soho with some other friends. I do apologise. I'd rather just be honest, than make up excuses. It's always difficult when I'm in London, as nearly every day someone wants to meet me for drinks & food, and to talk about shares.

Anyway, in the limited time available, I have to prepare for my meeting this afternoon with Geoff Wilding of Victoria (LON:VCP) . Thank you very much for your interesting questions, which I am collating & will ask. It's obviously going to be a slightly awkward encounter, but in my view it's always best to listen to management, and come to a conclusion based on a full appraisal of the available facts.

So today's SCVR is going to be written this evening, providing I get out of the meeting in one piece!


I believe Tracsis (LON:TRCS) should be announcing results in the morning - a buy & build group which has done a great job of expanding, using conservative funding.

Uniquely I think, the widely admired CEO of Tracsis, John McArthur, makes himself available here to answer questions from private investors in our comments section below. Why ever not?!

If John can do it, why can't other CEOs?

Brokers and other advisers seem to think that they need to ring-fence management from private investors. In my experience, it works a lot better when those walls are torn down, and PIs can talk directly to management. Lower fees for the mostly unnecessary intermediaries of course!



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Tracsis plc is a holding company. The Company is engaged in the business of software development and consultancy for the rail industry. Its segments include Rail Technology and Services, and Traffic & Data Services. The Rail Technology and Services segment includes its Software, Consultancy and Remote Condition Monitoring Technology, and also includes Ontrac Limited and Ontrac Technology Limited (together being Ontrac). The Traffic & Data Services segment includes data capture, analysis and interpretation of traffic and pedestrian data to aid with the planning, investment and ultimate operations of a transport environment and it also includes SEP Limited (SEP). It provides software products, consultancy services and delivers customized projects to solve a range of problems within the transport and traffic sector. It specializes in solving a range of data capture, reporting and resource optimization problems along with the provision of a range of associated professional services. more »

LSE Price
608p
Change
 
Mkt Cap (£m)
172.7
P/E (fwd)
23.4
Yield (fwd)
0.3



  Is LON:TRCS fundamentally strong or weak? Find out More »


59 Comments on this Article show/hide all

gus 1065 8th Nov 40 of 59

In reply to post #417009

Hi simoan.

Thanks for the comment on the Tracsis (LON:TRCS) valuation. I’ve held it in the past quite happily and rate the company as one of the strongest in its sector (for what it’s worth I also still hold Sopheon (LON:SPE) and Oxford Metrics (LON:OMG) that you mention - I think they’re looking expensive too and am more likely to top slice than buy more).

My comment on value is that in the short to medium term, I could maybe see a better (i.e. lower) entry point for non-holders than the current level. I’m not a slave to a high “V”, but last time I bought Tracsis (LON:TRCS) in summer 2017, they were on a V rank of about 25 as I recall. It’s on the watch list for something similar (although I fully accept it might be a long wait).

Gus.

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simoan 8th Nov 41 of 59

In reply to post #417219

Thanks for the comment on the Tracsis (LON:TRCS) valuation. I’ve held it in the past quite happily and rate the company as one of the strongest in its sector (for what it’s worth I also still hold Sopheon (LON:SPE) and Oxford Metrics (LON:OMG) that you mention - I think they’re looking expensive too and am more likely to top slice than buy more).

Hi Gus,

It all depends what you call expensive I guess. I'm still prepared to pay up for a quality company with good management and a strong balance sheet but I agree it's hard to make a case for buying currently.  BTW I may hold one or more of the other companies you mention too.

My comment on value is that in the short to medium term, I could maybe see a better (i.e. lower) entry point for non-holders than the current level. I’m not a slave to a high “V”, but last time I bought Tracsis(LON:TRCS) in summer 2017, they were on a V rank of about 25 as I recall. It’s on the watch list for something similar (although I fully accept it might be a long wait).

FWLIW I would never decide buy or sell based on the Stockopedia ranks, but then I'm not a factor investor. I only use them for screening and then do my own research. Funnily enough, even though I already hold I'd quite like the Tracsis share price to offer you a lower entry point too :-) 

All the best, Si

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mojomogoz 8th Nov 42 of 59
6

GAME Digital (LON:GMD) gets a lot of space in here. I bought a little of this earlier this year seeing as has cash and relative freedom (leases) to make a transition into an area where they have the chance to make a market and business for themselves in Esport....

...I sold today as I'm not getting it and as I feel there are negative hints in how they report:

1) And this is most trivial reason but the irritation made me flip switches generally....their morning RNS said I could listen in live at 9.30 to FY presentation on their website. I couldn't. Followed link and couldn't see the live connection. Perhaps I'm dumb and missed it...but e-stuff is their new business and they should get that basic right. It nourished my fear that this is management with so many balls in the air and things to do that they could struggle to do them well. I've had a nagging doubt they have a negative surprise in them and this helped that nag get to me.

2) The presentation of numbers (particularly Belong) is getting fluffier rather than more solid. This is red flag. The direction of travel should be greater clarity. For example, page 9 of presentation "A wealth of insight into our customers" is just fluff on the most part and what it does show is discouraging as only 7% of users are the "core" of active competition and community gamers. This could be looked at as they have loads of space to attract more of the core who drive higher utilisation rates...I think this core should be higher as the other categories are sort of a mix of childcare and parties. Page 12 could also just have more snap and good comparison.

3) Having been in a modest sized Belong arena its underwhelming...obvs the kick is the screens and the play...but this is not an environment for extended socialising say like when people have parties at bowling alleys (and the drinks and the snacks etc at inflated prices)...that puts me back into the point above re needing the gamer core in there.

4) I'm not a gamer...but my view of being a hardcore gamer is sort of a bit of an antiestablishment thing (I don't mean in a hardcore burn down the establishment sense) but just being a bit rogue in some form. Are Game producing environment for rads? Its tamer...with much less space to be a bit of arse than say at the bowling alley etc with someone always near by breathing down your neck. Killing my vibe man.

5) There's a lot of kids being taken by parents. That could be really fadish. A bit of word of mouth and old gamer curiosity gets them in the door to start with. What keeps them coming?

6) 40% revenue growth seems poor to me. If they got something hot I'd expect some more. This should be viral-ish.

7) Making a deal with SPD - https://www.stockopedia.com/sh... -  has a decent rational and was sensible but I always felt Game could have played their end harder. That they didn't suggested that they sold a 'maybe we could do this' to Ashley rather than a 'we're going to smash this'...circles back to whether mgt are capable. If I were big Mike I'd certainly help their concept along a bit if it didn't cost me as there's real scope to learn and find something interesting to do with his brand and estate. But I'd also clock their vulnerability and need for a deal...and in this and a bit of mix of too much for mgt to do is probably why SPD shared sights aren't going anywhere. Any weakness and Mike is going to to F with them to get more for himself.

That'll do right now for my riff. I'll probably be wrong and this is the start of a mega franchise :) Someone likely will have that in Esports...I believe it can happen...but I'm not sure Game are showing they have the vision, vibe or cajones to be the ones. Plus they're going to get played by big bad Mike.

mojo(probably mistaken)word out

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mmarkkj777 8th Nov 43 of 59
1

In reply to post #417234

Just a small point on Game. The name Belong seems a bit tame for teenage(plus) hardcore gamers. Sounds like you should rock up for a cup of tea and a biscuit. 

I know.... hardly cutting edge analysis by me, but I’m passing time in the doctors waiting room at the moment!!!



I nearly invested  in them earlier in the year after Paul’s write up. Still on the fence.

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simoan 8th Nov 44 of 59

In reply to post #417174

All I would ask John, and just about my only concern going forwards, is what his thoughts are on the the ROCE (as measured by Stockopedia) being so much lower than it was  3 or 4 years ago? I assume it is due to the acquisitions but I would prefer to see quite a different trend in ROCE. Do you anticipate this trend improving John?

Obviously, I should have calculated the ROCE myself rather than relying on historic numbers in the StockReport before asking the question of John. It looks like the reported ROCE for FY 2018 was a very respectable 18%. I'm pretty happy with that  but would still be interested to hear any comments John may have.

All the best, Si

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Trident 8th Nov 45 of 59
1

In reply to post #417244

Re: Tracsis (LON:TRCS)

May be worth asking if ROCE is even an key metric that they review!?

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Jonathan cranston 8th Nov 46 of 59
4

Paul,

Your analysis of stocks is ace and your reference to partying, duvet days etc is refreshingly honest

I like what you have to say on the buy/neutrality side and what Tom Winnifrith has to say on the AIM fraud side of things

Keep up the good work

Regards,

Jonathan

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simoan 8th Nov 47 of 59
1

In reply to post #417249

May be worth asking if ROCE is even an key metric that they review!?

Maybe they don't but as an external investor stuck with making judgments every 6 months based on the accounts, it's one of the best metrics to measure how well management are doing (even in a capital light business like software). You can then compare it with similar companies. I just wondered if John had any thoughts on this? Maybe he hasn't but I thought I'd ask.

All the best, Si


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pwozzy 9th Nov 48 of 59
1

Paul,

I love that you show your human side and are up front about enjoying a good party!

'Professionalism' in the stoic sense doesn't add anything, what really matters are your insights and analysis which always cut through the mustard.

Thanks for sharing your ongoing work and views, it's always been appreciated.

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John McArthur 9th Nov 49 of 59
4

In reply to post #417029

Hi jesseowens,

The short answer to your question is a resounding 'no'.

The cash we have on the balance sheet is all retained profit and is there to fund further accretive M&A activity as per our stated strategy. The specific timing of transactions is obviously something we are not able to telegraph to shareholders but suffice to say we have a good pipeline of opportunities and see this as a core part of the business.

Obviously, if we ended up going through some sort of M&A drought and ended up with >£30M cash there might be some pressure to return cash but I can say with confidence the chances of that happening is slim to none.

Hope this helps.

Best regards
John

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John McArthur 9th Nov 50 of 59
4

In reply to post #417174

Simoan,

Being candid ROCE is not a metric I look at and nor have we ever done. For businesses that specialise in a single, stable revenue stream I can see why this would be useful but looking at Tracsis as a whole it is largely irrelevant due to the impact of acquisitions that can have very different margins.

For example, we might a business that has a lower margin (compared to say software) but be very happy to do so if we manage to pay a good price for it and believe it will be able to grow sustainably. ROCE would be impacted negatively but I hope you agree this would be a false negative.

Ultimately I think we should be measured on absolute performance i.e. revenue and profit growth.

Hope this helps.

Best
John

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John McArthur 9th Nov 51 of 59
3

In reply to post #417034

fanmail,

We have an internal 5 year plan but as with all growth companies this is an evolving strategy that changes on the hoof.

However, getting down to specifics my own view is that we will maintain good levels of organic growth and added to this will be more transactions which will also experience their own growth (as evidenced by everything we've acquired in the past).

If you model this in Excel - and I leave you to make your own assumptions on M&A! - a doubling or trebling of the business seems plausible to me.

Best
John

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John McArthur 9th Nov 52 of 59
4

In reply to post #417064

dayyou,

Our US activity remains on-going, we have more pilots being rolled out and this geography continues to be revenue/profit generating. However, I think it's fair to say that our bandwidth and focus was very UK orientated last year (for all the right reasons) so there wasn't much RNS newsworthy things to talk about overseas.

Suffice to say the US remains a huge untapped market.

Best regards
John

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Ba10 9th Nov 53 of 59

Hi John,

What timing. Congratulations on the solid results and thank you for taking questions.

How do Tracsis core products (e.g. crew planning/monitoring software, condition monitoring technology) compare with products employed in European and North American markets (Ps. I only ask for a comparison - I believe there are still huge opportunities across the UK rail industry)?

You mentioned business development resources and sales cycles. Is the challenge greater with product development (e.g. configuring products to new markets) or marketing/promotional activity to reduce the sales cycle?

Network rail is a major customer. How is the relationship and Network Rail’s ability to invest in new products or software given their finances and the next funding cycle?

Thank you for your time.

Kind regards

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John McArthur 9th Nov 54 of 59
2

In reply to post #417169

Hi Trident,

Our method/approach to M&A has worked very well thus far and we have no plans to change this going forwards (your question suggests perhaps we should?).

We explicitly only entertain acquiring profitable, well run and well priced businesses so there is no need for rapid integration or trying to achieve huge economies of scale that might not even be possible. I think this is one of the key reasons our M&A has been so successful in the past (which is obviously not the case for other PLCs where large expensive transactions can only be justified via stripping out of costs or people).

Make no mistake, all the business we acquire eventually become fully integrated into the Group but we don't have the burden of doing this on a short time scale.

Best
John

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John McArthur 9th Nov 55 of 59
2

In reply to post #417229

Gus / Si,

If it helps the conversation with regards valuation, the only point I would make with regards Tracsis is that investors have to make some sort of assumption on what the future conversion of our cash pile will mean to revenue and - more pertinently - profit.

If you assume no further accretion then arguably Tracsis is already fully valued but if you assume that we can continue to buy good quality companies at the same historic pricing levels then putting say £15M of our £20M cash pile to work will deliver X profit to the bottom line. I have my own view of what X is but will refrain from doing so here!

Cheers
John

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simoan 11th Nov 56 of 59
1

In reply to post #417559

HI John,

Thanks very much for taking the time to reply.

Being candid ROCE is not a metric I look at and nor have we ever done. For businesses that specialise in a single, stable revenue stream I can see why this would be useful but looking at Tracsis as a whole it is largely irrelevant due to the impact of acquisitions that can have very different margins.

I wouldn't necessarily expect management to use ROCE as a metric internally but hope you can understand why an external investor working with much less information would use it. ROCE can fall for  a number of reasons and it's a good measure of how well management are doing. It is also an early warning sign that things are not going as well as they may seem on the surface - Tesco is a great example of this where ROCE was on a downward trend for several years despite EPS rising as management drove the company into a wall. There are many other examples of poor capital allocation leading to problems later on. 

For example, we might a business that has a lower margin (compared to say software) but be very happy to do so if we manage to pay a good price for it and believe it will be able to grow sustainably. ROCE would be impacted negatively but I hope you agree this would be a false negative.

I assumed this this was due to the acquisitions having lower margins and return on assets, so thanks for confirming this. Ideally of course, you'd be able to make acquisitions that did not have this effect, but I understand that good management can often improve things post acquisition.

Ultimately I think we should be measured on absolute performance i.e. revenue and profit growth.

This is where I don't completely agree. Revenue and profit growth are relatively easily obtained by making acquisitions but some investors are wary of this - it only takes one poor acquisition to turn the boat upside down and there are so many examples of perfectly sound companies doing this that it's not funny. 

I understand that there is likely a lot of pressure on company management to focus on profit growth from institutional investors and advisers, and of course, it is normally the case that management incentive schemes are based on earnings per share. I believe Tracsis is no different in this regard. 

However, given two companies on a similar rating, I think everyone would prefer a company growing organically over one growing by acquisition. And I'm not on my own here; there are some very successful well-known investors who take the same view. Here's what Warren Buffet said in his 1979 shareholders letter:

"Earnings per share, of course, increased somewhat (about
20%) but we regard this as an improper figure upon which to
focus. We had substantially more capital to work with in 1979
than in 1978, and our performance in utilizing that capital fell
short of the earlier year, even though per-share earnings rose.
"Earnings per share" will rise constantly on a dormant savings
account or on a U.S. Savings Bond bearing a fixed rate of return
simply because "earnings" (the stated interest rate) are
continuously plowed back and added to the capital base. Thus,
even a "stopped clock" can look like a growth stock if the
dividend payout ratio is low.

The primary test of managerial economic performance is the
achievement of a high earnings rate on equity capital employed
(without undue leverage, accounting gimmickry, etc.) and not the
achievement of consistent gains in earnings per share. In our
view, many businesses would be better understood by their
shareholder owners, as well as the general public, if managements
and financial analysts modified the primary emphasis they place
upon earnings per share, and upon yearly changes in that figure."

Anyway, please keep up the good work!

All the best, Si

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abtan 11th Nov 57 of 59
2

Thought I'd add a few comments to the GAME Digital (LON:GMD) announcement last week.


  • The webcast for the FY results is here. I found it extremely insightful (sorry, can't get link to open in new window)
  • The presentation for the results is here, also very insightful (sorry, can't get link to open in new window)
  • There are 69 lease renewals after December 2019 (out of 276 stores)
  • The company says there are 108 potential lease events before December 2019. I actually believe that most of these leases have already expired, but management didn't get around to negotiating them in 2018 (understandable given they would have had to negotiate more than 1 per day in 2018 to get around to them all).

    Check out these charts from recent presentations and the material increase in 2019 expiring leases:

5be8b98d81e00Belong_1.JPG5be8b9a738ea4belong_2.JPG


  • In the webcast someone asked how many stores were loss-making.
    A: "only a handful"
  • During half-term some arenas are opening at 7:30am/08:00am as there is no other time available  (there is 60-70% utilisation in half term)
  • Constantly changing opening hours of arenas as they work out the best utilisation times
  • They will never open an arena with only 12 stations again as too small
  • Stratford recently opened with 36 stations with the ability to expand to 48. Management already think this won't be enough.
  • Total Capex for large Belong (40+ stations) + Store = £350k. Payback period = 2-2.5 years
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John McArthur 12th Nov 58 of 59
2

In reply to post #417899

Simoan

Just to clarify, when I mentioned absolute performance I should have clarified that my measurement of this takes into account shareholder dilution i.e. ABSOLUTE performance.

I understand your sentiment about M&A execution risk but you could easily say the same thing about abortive organic product development or spending millions on a product/service no-one wants to buy. Bear in mind we have now done 10 acquisitions and each one has been highly accretive, profitable and grown significantly post acquisition.

I don't pretend that our M&A is risk free or that we aren't prone to buying a lemon in future but I think shareholders have enough evidence to suggest our approach is relatively well managed.

Cheers
John

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simoan 12th Nov 59 of 59
1

In reply to post #418204

I understand your sentiment about M&A execution risk but you could easily say the same thing about abortive organic product development or spending millions on a product/service no-one wants to buy. Bear in mind we have now done 10 acquisitions and each one has been highly accretive, profitable and grown significantly post acquisition. 

I don't pretend that our M&A is risk free or that we aren't prone to buying a lemon in future but I think shareholders have enough evidence to suggest our approach is relatively well managed.

John,

Just to be clear... I was making a general point about M&A and not referring specifically to the acquisitions made by Tracsis (LON:TRCS) where I would say your record to date has been exemplary. I have no problem investing in companies which are growing using a "buy and build" strategy which have sound management with a track record of improving operating performance post acquisition. Long may you continue to do so :-)

All the best, Si 

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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