Small Cap Value Report (Thur 23 August 2018) - TRCS, FUL, SPE, MACF, WEY, ARC

Thursday, Aug 23 2018 by

Good morning! 

Today we have:

Tracsis (LON:TRCS)

  • Share price: 723p (unch.)
  • No. of shares: 28 million
  • Market cap: £205 million

Before we get into today's news, I'd like to mention that John McArthur (CEO of Tracsis (LON:TRCS) ) joined us in the comments thread for yesterday's report.

I had said that I wouldn't pay its high valuation multiple for any company in its sector, and Mr McArthur asked me to explain.

The simple answer is that I viewed Tracsis as a transportation consultancy, software and hardware business, on the basis of what it says on its own website, and having browsed the websites for its various services.

Speaking to Leo in the comments, Mr McArthur writes:

"We are not a 'software consultancy' business but simply a technology business in its purest sense i.e. we are first and foremost a software company that develops and licenses over a dozen software products which we own all the IP for. We were originally a spin out from the University of Leeds School of Computing and employ over 100 full time professional software developers who generally have very strong maths/physics or engineering backgrounds. Latterly we have also developed our own hardware and now also do a variety of data capture work using all sorts of novel technologies.

I understand the point you are trying to make about consultancy businesses and 'people businesses' but this simply isn't the case with Tracsis. The vast majority of our profit is derived from long term, software licensing contracts with blue chip customers and less than 10% of our income is consultancy. The consultancy we do undertake is highly specialised and is generally derived from doing bespoke projects by using our own products which will be similar to all software companies."

It's always helpful to hear things from management's point of view, so thank you very much John for putting this across!

Within reason,…

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All my own views. I am not regulated by the FSA. No advice.

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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 »

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The Fulham Shore PLC is engaged in the management and operation of The Real Greek, Franco Manca and Bukowski restaurants in the United Kingdom. The Real Greek food centre serves dishes of Greece and the Eastern Mediterranean. Franco Manca serves Neapolitan sourdough pizza, which is baked in a wood burning brick oven. Bukowski is a London-based, charcoal-grill restaurant and bar, serving breakfasts, burgers and grills. The Company operates 45 restaurants, comprising 32 Franco Manca, 12 The Real Greek, and one Bukowski Grill franchise in Soho. The Company’s subsidiaries include Kefi Limited, FM6 Limited and Souvlaki & Bar Limited. more »

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Sopheon plc is a United Kingdom-based company, which is engaged in the provision of software and services in the product lifecycle management (PLM) market. The Company operates in two segments: North America and Europe. Its Accolade solution provides integrated support for innovation planning, roadmapping, idea and concept development, process, project, portfolio, resource and in-market management. Its offerings include alignment of long-term innovation plans with market requirements, industry regulations, and supply chain capabilities; generation and development of ideas and concepts to fill gaps relevant to achieving strategic initiatives; process and project management that tracks and enables decision making, focused on evaluating projects associated with innovation initiatives, and data management, analytics and integrity tools. Its subsidiaries include Sopheon Corporation, Alignent Software, Inc., Sopheon NV, Sopheon UK Ltd and Sopheon GmbH. more »

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

57 Comments on this Article show/hide all

Trident 23rd Aug '18 38 of 57

Great to hear from John at Tracsis (LON:TRCS) engaging with the investor community, something he (and his FD) have generally done on an annual basis via an interview with Paul.

I have some sympathy with the issues he states about the report and accounts. Many sets of accounts have become of a form of extra long presentation that require much page turning before getting to the nub of of the P&L, Balance sheet and Cash Flow Statement.

That being said the website is a good place to use reasonable marketing tools, and I will always visit the company website for investor information. I sense a bit of Scottish fiscal resistance to to what may be considered frivolous or superficial marketing matters. But, the odd video or presentational piece is useful extra information to the dry stuff, especially when the business is more of a mix.

I have also seen one CEO decide that private investors should be wooed, only to get heartily sick of them when the company results when they were less than they were formerly. So you have to be careful what you wish for as a CEO!

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Graham Neary 23rd Aug '18 39 of 57

In reply to post #393154

Cheers Jon! G

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peterthegreat 23rd Aug '18 40 of 57

I would also like to add my thanks to John McArthur of Tracsis for addressing Graham's assertions and explaining a bit more about his company. Spending management time on making the web site and financial reports more informative for private investors like me would indeed be welcome, but I can understand why John has not done this as it would be of little benefit to the company which, as John says, does not need to court private investors. I am sure the content of the web site and financial reports would not make any difference if Tracsis wished to raise money. I would also suggest that the valid points made by Graham apply to most small companies, including Sopheon which Graham appears to have a positive view on. I regard the limited information provided by small companies as an occupational hazard for private investors interested in this sector and one of the reasons why there are sometimes bargains to be found amongst these companies.

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matylda 23rd Aug '18 41 of 57

In reply to post #393174

Thanks a lot - I am still trying to work out if it provides any value based on 10% EPS growth over 2 years (forecast) versus the current valuation.

Blog: Briefed Up
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mccarthydavid 23rd Aug '18 42 of 57

I'm interested in the community's  view of using the Stockranks on results day. Taking Arcontech (LON:ARC) as an example, Graham rightly points our that there is nothing remarkable about the Stockranks.

Arcontech announced significant growth over last year that will change a number of long term metrics and consequently some of the stocks ranks.

By way of an example, the Net Margin % 5yr Avg metric used within the quality rank is currently reported as 7.34. By my calculations once the 2018 results are imported and the Stockopedia hamsters have cranked the algorithms, the new value will be somewhere in the high teens. This will move Arcontech from around 600 in the universe up to around 300 and presumably increase the overall quality score too. I would imagine some of the other metrics (ROCE, PE, earnings surprise) will also change and improve Arcontech's overall rank. I'll find out in the next couple of days if I'm correct.

I guess my questions become, are the Stockrank metrics reliable once new information becomes available?  What do others do (apart from waiting a few days!)? And, does it matter?

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rpannell 23rd Aug '18 43 of 57

In reply to post #393259

In reply to mccathydavid, #42
I guess it depends on whether you are a quant or quality investor. If you are a quant investor, then you ignore the SR values just after results are released and wait until the new SR figures are out.

If you are a quality investor, then you get your calculator out as soon as new results are announced then make your decision whether to buy or sell.

I'm a quant investor, so rarely look at company results except to check for any errors in the SR calculations

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AnonymousUser252054 23rd Aug '18 44 of 57

In the future any company that has had their business misrepresented by Graham might be better off just keeping shtum. It's just not worth it.

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gsbmba99 23rd Aug '18 45 of 57

As an Arcontech (LON:ARC) shareholder, maybe it's worth highlighting a few things that attracted my attention when I first read about the company 18 months ago and the research I've done since.

It's not immediately apparent, but this would probably be better described as a fintech SaaS business located near Old Street roundabout. But the company doesn't market itself that way. It, until recently, reported Annualised Recurring Revenue that had been steadily climbing in recent years save for a large hiccup a couple of years ago (more below). It is, however, a subscription business with most of it's clients paying annual license fees in advance. It has a specialty in real time market data transmission which it is using to expand its product set. It's top three customers, accounting for more than 50% of revenue, are Citibank, JP Morgan and Deutsche Bank (not necessarily in that order). The fact that the titans of finance contractually agree to pay a minnow annually in advance makes me think the company might have something interesting.

The company is generally very conservative and this is reflected in the accounting policies. Development expenditures, which are considerable, are all expensed. The cash balance is very large (partially offset by deferred revenue) and represented upwards of 30% of the market cap until the recent upward movement in the share price on the "comfortably ahead" statement. Until this year, there was no recognition for the (approximately) £9m of tax loss carryforwards the company has. I don't know what convention is on deferred tax assets but, at a 20% tax rate, the nominal, undiscounted value is £1.8m, of which £270k has now been recognised.

Arcontech (LON:ARC) has a new desktop product they have been developing. Originally, there were five Tier 1 trialists. If I am counting correctly, two have been converted as customers and a further three new trialists have been added. As I understand it, it is a significant hurdle for a company of the size of Arcontech to get finance majors to agree to support their products internally. The fact two customers have done so is significant, even if the value of those subscriptions are, at the moment, unlikely to be material. The new product has the potential to appeal to a broader customer base than just investment banks.

I agree that revenue progression at first glance doesn't appear overly exciting. The revenue progression masks the fact that ARC won a significant contract from a customer that changed their mind and never installed it. The company ended up recognising one year's revenue (probably about £300k) but this produced the proverbial snake swallowing a rat. The company has, however, demonstrated the ability to expand profitability at an attractive pace provided it can continue to grow revenue. Operating margin has expanded dramatically on relatively static costs. Given that 87% of the FY18 uplift in revenue dropped to the PBT line, I will continue to watch revenue development very carefully.

In terms of comparison, I would say it has revenue security rivalling someone like StatPro (LON:SOG) or Sage (LON:SGE) but with better growth prospects and a better valuation (after adjusting for cash). Essentially, it is Usain Bolt, but faster. All kidding aside, it does come with extreme customer concentration which the company is seeking to address. To counter balance that risk, customer retention has been very good. They've lost three customers altogether. The above uninstalled contract termination (think Liverpool FC's shirt sponsor), a small betting company that was acquired, and the US capital markets subsidiary of a UK bank that closed or severely downsized its Stamford, Connecticut office (think Fred and Shred or Nat and West).

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danielbird193 23rd Aug '18 46 of 57

In reply to post #393269

I'm very interested in your description of yourself as a "quant" investor. You don't look much at results - does that mean you trade solely on the basis of Stockrank / other metrics available through Stockopedia.

I ask because I have been watching with interest Roland Head's SIF Portfolio which is well-documented on the discussion boards here. He is doing a seemingly similar "quant" type investing, with some fairly mechanical rules governing stock selection and portfolio management. I've been impressed by how well the approach has been doing, so much so that I'm thinking of doing something similar. Would be interested to see if this type of approach has worked for anyone on here.

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Roger Lawson 23rd Aug '18 47 of 57

Re Tracsis, which I have held since 2013, there seems nothing exceptional to me in the concentration of customers bearing in mind the sector in which they are operating. Also bearing in mind it's primarily a software license company it seems very unlikely that customers would stop using their products and switch to something else, even if there were equivalent other products available. The sales have grown both rapidly and consistently and the share price has gone up 4.5 times since I first purchased. As regards understanding what the business does, the CEO has done numerous presentations to investors - I think I have attended at least three of them. Also there is quite a lot of detail on this web page and its offspring:

Website: Roliscon
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Emperor 23rd Aug '18 48 of 57

In reply to post #393084

John McArthur clearly runs a very good business at Tracsis and I've followed it since a TMI article several years ago. Brilliant that he has engaged directly with Paul and Graham and now responded to issues raised here on Stockopedia by investors.

Shame that I can't find an Investor Presentation on the Tracsis Investor website. Do Tracsis not present to Analysts every 6 months? Why is this not shared with retail investors?

Shame that the Annual Report is a minimalist piece presented to appeal those who like to read lots of simple text and numbers with little in the layout which is engaging or appealing. It is a hard read. Even without turning it into a picture book this could be made much easier to read and highlight the key messages he wants to convey aiding investors greater understanding, and potential investment.

The website works to a point but as he admits could be better. Provision of the Presentation and a more visually interesting AR should, in my view, be the priorities.

Why make it more difficult for those who are not Balance Sheet savvy or who prefer to read a well laid out document rather than pages of black and white text?

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Andrew L 23rd Aug '18 49 of 57

In reply to post #393314

Thanks Roger. I guess it would be helpful if companies put presentations on their website. Doing it in person is ok but why not also put it on your website. This is something I have seen with other companies. I think FairFX and Bioventix are two other companies that give presentations but don't put them on their websites. Even if you attend a presentation you can't remember everything that was said or all of the slides.

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ridavies 24th Aug '18 50 of 57

In reply to post #392909

Thanks now I have it!

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John McArthur 24th Aug '18 51 of 57

In reply to post #393164


We are always happy to attend retail investor presentations and I've been to various ShareSoc and Shares Magazines events over the years. However, for reasons of sheer frugalness (the Shares evenings are £4K a pop) I much prefer privately held gatherings.

We also openly encourage retail investors - regardless of holding - to visit us in Leeds, Manchester or London and several times a year we will hold informal sessions at our offices.

Happy to extend this to anyone who is interested in our story (holders and non-holders) and I can be contacted directly via email on

Best regards

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tony akram 24th Aug '18 52 of 57

In reply to post #393584

Have to say I have held Tracsis for over one year now excellent company and I think John is great at protecting shareholder value (he has a significant holding himself) and IMO does not waste money unnecessarily sign of a good CEO in my view.

Also credit to John for keeping us all engaged more CEOs could learn from him I continue to hold

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Effortless Cool 27th Aug '18 53 of 57

Thanks for the write up on Macfarlane (LON:MACF), Graham.

I have updated my own forecasts to reflect the interim results to 30 June 2018. These were good figures, and the results also gave details of two small acquisitions (c. £6m revenue p.a.) post-period-end.

My revised forecasts are (broker consensus in brackets):
# Revenue: 2018 £217.7m (£221.5m), 2019 £227.4m (£232.5m)
# Reported net profit: 2018 £8.5m, 2019 £8.9m
# Adjusted net profit: 2018 £10.6m (£11.0m), 2019 £10.9m (£12.1m)
# Reported EPS: 2018 5.37p, 2019 5.66p
# Adjusted EPS: 2018 6.75p (7.00p), 2019 6.91p (7.60p)
# DPS: 2018 2.25p (2.30p), 2019 2.40p (2.50p)
# Net debt: 2018 £14.6m, 2019 £10.8m
# Pension deficit: 2018 £5.5m, 2019 £0.0m
(Adjusted figures add back amortised intangibles)

Revenue was very strong in the period, with Packaging up 5% versus the prior period on a like-for-like basis and Manufacturing up 11%. Both of these represent the strongest in-period like-for-like performance over the period since 2012, when my data set starts. The sizeable difference in forecast revenue between my figures and broker consensus likely reflects a more pessimistic view of future prospects on Manufacturing on my part. This sector has been on a prolonged downtrend and, although the last two periods show strong indications that that has been reversed, I want to see more evidence before I give it too much weight.

A slight flattening of the gilt yield curve has meant that the reduction in pension deficit has been much less than my previous forecast. However, based on forward rates for 10-year gilts, I remain confident that the deficit will fall rapidly and expect it to extinguished during 2019 H1.

My valuation increases to 112.3p, representing a 5% premium to the latest closing price of 107.0p. On that basis, I rate Macfarlane (LON:MACF) a HOLD.

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Intravnus 30th Aug '18 54 of 57

In reply to post #393289

Superb piece on Arcontech (LON:ARC) there, gsbmba!

I felt that the piece by Graham (limited for time admittedly) did not do the company's update justice so your contribution was welcome. I have been accumulating Arcontech (LON:ARC) since last autumn so I say this with total bias!

I hope to get to the AGM on 27th September.

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abtan 2nd Sep '18 55 of 57

A little late but for anyone holding Arcontech (LON:ARC)
I wondered what your thoughts were on the fact that 59% of revenues in 2017-18 came from 3 customers (up from 55% in 2016-17).

One would think that the products are permanent fixtures once adopted so this shouldn't really be an issue (indeed I used Excelerator a long time ago and remember being very impressed with it), but then I noticed a Year-on-Year revenue drop in Asia, so maybe not everyone sticks around?

Apart from those 2 concerns (which are likely to keep me out) the metrics look great, with nearly all revenue dropping to the bottom line.

Cheers for any thoughts

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gsbmba99 3rd Sep '18 56 of 57

In reply to post #395434

The customer concentration at Arcontech (LON:ARC) is just a fact of life in the intermediate term. It is, of course, a double edged sword. The good news is that JPM, Citi and Deutsche (not necessarily in that order) are very large customers and two of those three (specifically customers 2 and 3 as per the results announcement) accounted for nearly all of the increase in revenues. One of those three became a meaningful subscriber to the new desktop product. Furthermore, two of the company's top three customers increased their commitment to and reliance on the company. The bad news is that as a result of significant growth in these relationships with customers 2 and 3, customer concentration increased.

The new desktop product is likely to have appeal outside of just investment banks but the most natural targets for the new product are the existing customers. While the company did, I believe, secure a new customer that isn't an investment bank, that relationship is obviously new and isn't all that meaningful yet.

Not sure what to make of your point on the Asia revenue number. I didn't see any mention of a customer loss in the announcement. There was mention of the Asia based sales person moving to London. Perhaps it's related to this? In any event, my sense is that there is considerable flexibility on where customer revenues are booked. For example, two of the top three customers are based in NY and are US corporations but those revenues don't appear to be booked as US revenues. I've been told that customer geographies are sometimes changed to mask the origin of revenues for competitive reasons.

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abtan 3rd Sep '18 57 of 57

In reply to post #395714

Re Arcontech (LON:ARC)

Thanks for the response, much appreciated.

I think we're both in agreement with regards to the customer concentration. It is what it is, but at least they're big players.

(To add a bit of flesh to my earlier post, my ex-company from many years ago (now FTSE250, but was much smaller about 10 years ago) used Excelerator. It was brilliant, but I don't recall it being indispensable. In fact, knowing how old it is makes me wonder why it hasn't been a revenue driver in all this time?)

With regards to Asia, yes, I noted the sales manager relocating. However, my post was in reference to a section on revenue by geography in the results published last week. Revenue dropped from £27,000 to £2,232. Peanuts in the whole scheme of things, but I was surprised to see anything going down given the bullish commentary.


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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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