Small Cap Value Report (Tue 21 Feb 2017) - TRAK, DOTD, UTW

Tuesday, Feb 21 2017 by
67

Good morning!

I've just added my own comments on Fishing Republic (LON:FISH) to yesterday's SCVR. Also, there are some very interesting reader comments after yesterday's article, which are well worth a read. Do I think FISH is likely to be the next big multibagger? In a word, no. Although in this mad bull market right now, anything can happen.

Let's start the day with a profit warning.


Trakm8 Holdings (LON:TRAK)

Share price: 71p (down 35.5% today)
No. shares: 32.5m
Market cap: £23.1m

Trading statement (profit warning) - it's no surprise to see another profit warning here. As I mentioned here on 7 Sep 2016, and again here on 28 Nov 2016, there were good reasons to sit this one out. Poor interims, and challenging full-year forecasts is usually a dangerous combination, giving a heightened risk of another profit warning. Which is exactly what has happened unfortunately. My commiserations to holders of the stock.

This is the key paragraph;

...revenues are now expected to be only modestly ahead of FY2016 with adjusted operating profit significantly below FY2016, with a consequent impact on cash flow and indebtedness

The main reason given is this;

new revenues being booked later in the current financial year than expected or delayed  into FY2018

Or to put it in more simple terms, the company has missed its sales targets.

The other reasons given look spurious to me, as they were already known, indeed planned, factors, nothing new;

shift in revenue model (towards more SaaS and rental revenue) continues to result in  short term revenues, cash generation and profitability being suppressed to the benefit of  the longer term

continuing, deliberate reduction in contract manufacturing for third parties, to provide  capacity for solutions demand, leading to a reduction of £2.5m in revenues this year

Cost-cutting has already been implemented;

the Board has taken steps to reduce annualised overheads by c.£1.5m and will ensure that any increases are held in line with revenues


Revised forecasts - published today make fairly shocking reading. This is a horrible profit warning. Adjusted PBT forecast for y/e 31 Mar 2017 is down from £3.8m to just £1.0m. Remember that adjusted numbers are companies putting the most favourable gloss they can on the results too!

Adjusted EPS is now forecast to be only 2.8p. That's terrible! It was only Aug 2016 when the…

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Trakm8 Holdings PLC is a Big Data company. The Company, through its subsidiaries, manufactures, distributes and sells telematics devices and services. The Company focusses on owning the intellectual property that it uses in its products and solutions. It supplies its customers in the fleet management and insurance sectors across the United Kingdom. In addition, the Company provides hardware devices that can be integrated into third party telematics or Internet of Things (loT) solutions. It offers Configuration Manager, Product Datasheets, Radio Frequency Identification, Telematics Devices, Vehicle Connectivity and Accessories, among others. Its portfolio of solutions includes Trakm8 ecoN, Trakm8 Tacho, Trakm8 Secure, Trakm8 Logistics and Trakm8 Insure. Its portfolio offers telematics solutions, including dashboard cameras that enable customers to record driving incidents and mitigate the risk from crash to cash accidents. It provides bespoke solutions and engineering support services. more »

LSE Price
20.2p
Change
1.0%
Mkt Cap (£m)
10.0
P/E (fwd)
17.3
Yield (fwd)
n/a

dotdigital Group Plc is a United Kingdom-based company, which is engaged in providing software as a service (SaaS) and managed services to digital marketing professionals. The Company offers dotmailer, which provides e-mail and multi-channel marketing automation platform with various tools that enable marketers to create, manage, execute and evaluate various campaigns. In addition to its automation technologies, the Company also provides multi-channel marketing consultancy and services for businesses seeking to manage customer acquisition, conversion and retention. The Company also has pre-built integrations with e-commerce platforms and customer relationship management (CRM) products, such as Magento and Salesforce. dotmailer helps in using contact data to design, test and send automated campaigns. The Company's subsidiaries include dotmailer Limited, dotsearch Europe Limited and dotmailer Inc. Through its subsidiaries, it is engaged in providing Web- and e-mail-based marketing. more »

LSE Price
92p
Change
-1.1%
Mkt Cap (£m)
276.6
P/E (fwd)
24.7
Yield (fwd)
1.0

Utilitywise plc is a United Kingdom-based business energy and water consultancy. The principal activity of the Company is of an intermediary for energy supplies to the commercial market. Its operating segments include Enterprise and Corporate. The Enterprise segment is engaged in energy procurement by negotiating rates with energy suppliers for small and medium-sized business customers throughout the United Kingdom, the Republic of Ireland and certain European markets. The Corporate segment is engaged in energy procurement of larger industrial and commercial customers, often providing an account care service and offering a range of utility management products and services designed to help customers manage their energy consumption. It provides energy management services, including procurement, energy reduction and audit, carbon offsetting, smart metering, water brokerage, design, manufacture and supply of timers, controllers and building management systems, and the Internet of Things. more »

LSE Price
1.9p
Change
 
Mkt Cap (£m)
n/a
P/E (fwd)
n/a
Yield (fwd)
n/a



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


22 Comments on this Article show/hide all

Howard Adams 21st Feb '17 3 of 22
2

Paul and any others

I see Waterman (LON:WTM) has been dropping steadily since 15/02 & 16/02. Also, interims to be presented 28/02. Can you or any one else interested in Waterman (LON:WTM) see a reason for this? (I hold).

Does it look like bad news is coming I wonder?

Regards
Howard

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Paul Scott 21st Feb '17 4 of 22
7

In reply to post #172294

Hi billytk,

FWIW, I think mgt at TRAK are actually pretty straight. They're not con artists, like some on AIM, in my view. Although a year on from my interview, I don't think they're anywhere near as competent as I thought they were back then, because they've ballsed things up over the last year!

I actually approached them about doing my interview back in Jan 2016, and didn't charge any fees, because I thought it was only fair to give them a right to reply against a mixed bag of attacks from Tom Winnifrith. A lot of Tom's specific attacks struck me as unfair. So I gave them a chance to reply to reader questions, and I think about 50 questions were submitted & answered in the end.

Bottom line, the company has just failed to get anywhere near its forecast sales & therefore profits. That doesn't necessarily vindicate the specific bear points. But it does vindicate a generally negative stance on the company.

I turned neutral to negative on the company when the facts changed for the worse - in Sep 2016.

It's tempting to buy some now, but whenever I've done that before, it's nearly always been a mistake. So personally am biding my time, and may not bother buying back in at all. Maybe it's just too difficult to value, given the now poor track record, and uncertainty concerning timing of contract wins, etc.

There are lots of companies where Directors believe in their sales forecasts, only to miss by a mile when some big contracts fail to get signed by the year end. It's a generic problem for lots of smaller companies.

Regards, Paul.

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bobo 21st Feb '17 5 of 22

Trak8 on my avoid list after making some money in the autumn

Sold out of UTW this am, they are not going anywhere at the moment so leaving well alone

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rustle2 21st Feb '17 6 of 22
2

Need to battle against the 'fear of missing out' on any subsequent rise!

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gus 1065 21st Feb '17 7 of 22
4

I recall Trakm8 Holdings (LON:TRAK) was a bit of a glamour growth stock a couple of years back and was able to put away quite a reasonable placement with institutions in the mid-300p's. Clearly it's lost its mojo since then and the share price has taken a caning. The Route Monkey acquisition doesn't seem to have delivered all that was promised either.

This said, they seem to have a decent client franchise and possibly one to keep watch on if the recent investment in the business justifies the apparent management optimism. I think there is still a reasonable core business and decent management - possibly all the better for the recent tough times - so while not jumping to catch the falling knife, I'll watch for a momentum shift with a view to getting back in at some point.

Best,

Gus.

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peterthegreat 21st Feb '17 8 of 22
2

I was wondering if Paul or Graham might be willing to cast a financial eye over today's results from Airea as the operating profit is up 76% and the basic eps up 51% but the share price at the time of writing is down 14%, although it did jump a little just before the results were announced. Perhaps some analysis of the accounts may shed some additional light on this possible anomaly which I think may result from a very cautious outlook from the company.

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andrea34l 21st Feb '17 9 of 22
1

In reply to post #172306

Howard,

From recollection, the last update indicated that figures would be in line with last year, which if so is a pretty dull performance. I just looked up the last RNS again, it says:

...the Board expects to report Interim Results consistent with market forecasts for the year as a whole, with revenue, profit and operating margin percentage generally in line with the prior year comparable period.

To me that indicates things are pretty flat :-/

Andrea

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rhomboid1 21st Feb '17 10 of 22
2

In reply to post #172330

Hi Peter

I think some holders were taken aback by the macro stuff and were sitting on profits and all got stuck going out of the exit at the same time!

I re read it two or three times and bought a few more as I really like the under promise over deliver ethos of the current directors. A single figure PE , net cash, high Capex incl. a new mega loom http://www.cardmonroe.com/125/card-monroe-colorpoint-machine ,new products to come and full site rationalisation benefits still to come. I think buying at current levels makes far more sense than selling. In fact I can see the co. buying back today.

PS I've got loads so I'm talking my own book!

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Ramridge 21st Feb '17 11 of 22
4

Re. Trakm8 Holdings (LON:TRAK) I am sad but not surprised by the turn of events with this company. I held a decent sized stake until the 7/9/16 update and then sold out for a modest gain.

The following red signals were there in that update:
- 1H results lower than the comparable previous year's
- claim by management that 2H weighting will make things right for the full year
- transition to SaaS model with known adverse impact on revenues and immediate profits
- string of acquisitions, especially Route Monkey which raised eyebrows about the real value of the deal
- lumpy revenue streams with dependencies on securing contracts

That is not to say that all companies showing these signs will head south. But the probability is IMO over 90% .

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Howard Adams 21st Feb '17 12 of 22

In reply to post #172333

Andrea

Thanks for your point.

Regards
Howard

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drvodkaquickstep 21st Feb '17 13 of 22
2

In reply to post #172306

Howard

Its general malaise given the anticipated year of consolidation ahead given a flatter order book after a few years of growth. Investors all seem to be chasing growth stocks at the moment so Waterman have fallen off the radar. If you are a long term holder like me you just sit and wait whilst collecting a decent (8-10% for me) dividend.

They are winning lots of work and recruiting; I have no doubts over their ability to perform well with a decent time horizon.

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Howard Adams 21st Feb '17 14 of 22

In reply to post #172351

drvodkaquickstep

Encouraging point, thanks for making it. I also sense they are doing well and developing. I note they are hiring new directors, gaining business and industry recognitions. That in part was my surprise at the dropping price.

Regards
Howard

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peterthegreat 21st Feb '17 15 of 22

In reply to post #172339

Thanks for the comments on Airea from Rhomboid and Andrea. Yes, one of the things I was attracted to was the apparently careful way the company was being managed and the cautious outlook is consistent with that. My impression is that the company's long established brands are quite valuable and there are signs that the company is exploiting them better.

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rhomboid1 21st Feb '17 16 of 22
1

In reply to post #172360

I agree , I think they just muddied the water with the Macro musings, Andrea was talking about Waterman (LON:WTM) , Airea (LON:AIEA) stated that current trading is ahead of last year.

Cheers

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marben100 21st Feb '17 17 of 22
4

Hi Paul,

I have been a happy holder of dotDigital for 4 years now, and attended their analyst presentation this a.m. On this point:

My main worry is that most people are so fed up with being bombarded with huge quantities of emails, that I wonder what the long term future holds?

I feel dotDigital is particularly strong. In their marketing, they emphasise "list hygiene" (i.e. ensuring that only recipients who want to receive the marketeers emails get them). They don't permit their clients to use bought in lists. They also provide services to help their clients optimise the targeting & messaging of their emails, for maximum effect. dotMailer also offers "marketing automation", whereby appropriate emails are sent out to specific customers in response to customer actions (or inaction!). They also offer messaging via other digital & social media.

Today's presentation stated that over 50% of marketers achieve an RoI of over 10x with a well targeted email marketing campaign of this type. The presentation also states:

the average RoI across all brands is £30.01 per £1 spent, up from £29.64 last year.

A compelling message!

I added back some previously topsliced shares today - didn't mind paying a higher price (kinda the converse of the situation with TRAK!).

Cheers,

Mark


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JMLDutch 21st Feb '17 18 of 22
6

Re: TRAK

The new products have taken longer to bring to market, as previously stated, but the early customer reaction to these has been excellent. For example:
· we have produced our first production batch of integrated 4G cameras and these are being field-tested
· our latest generation micro telematics device has completed customer approval testing
· our next generation server architecture with fully integrated optimisation is in beta test"

None of these "examples" demonstrate an excellent early customer reaction.

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nhb001 21st Feb '17 19 of 22

In reply to post #172384

Hi Mark,

I too have been a happy DOTD shareholder for a few years now. Nice results statement today but I wonder if anything shown at the presentation today explained Paul's point in his report. It would be nice to tie up that loose end.

[PS] Mind you, a concern I mentioned last time this company reported, is that all the growth seems to be coming from higher average spend from existing customers;

Average monthly recurring spend across all clients has grown by 24% from £525 to £650.
So surely revenues should have risen more than 17%? This seems to imply that there's quite high churn in customers dropping out, being replaced by new customers, maybe?

Best Wishes

Neil

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marben100 21st Feb '17 20 of 22
7

In reply to post #172405

Hi Neil,

Must admit, I'd hadn't seen Paul's point at the time & it wasn't specifically discussed, but there might be some confusion...

The 24% increase refers specifically to recurring revenues, whereas 17% refers to revenues overall - including legacy (pre-SaaS) licences and professional services. Now, given the figures for overall revenues, and the increase in the proportion of recurring revenues (from 78% to 81%), I calculate that recurring revenues have grown by 20.7% - not so far out of line with the growth in revenue per customer.

What was mentioned is that they're refocussing a larger proportion of their sales team/effort on higher-value customers. That makes sense to me, applying the Pareto principle, that 80% of profits generally come from 20% of the customer base - and might also contribute to explaining a higher rate of growth in recurring revenue per customer than in total recurring revenues.

Best,

Mark

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Paul Scott 22nd Feb '17 21 of 22
3

In reply to post #172330

Hi Peterthegreat,

I've had a quick look at Airea (LON:AIEA) as prompted by you.
It looks attractive on some levels - profits up, divis, bal sheet good.

However, on the downside, as you correctly point out, the outlook comments sound distinctly wobbly. Also there's a significant pension deficit. It also looks fairly capex-hungry.

Although profitability has improved, turnover seems to have declined over the last 5 years. So my worry is that, in a market which is seeking growth companies, Airea shares could languish. With little liquidity in the share, it could be a lobster pot share - that you can buy, but then can't sell (without taking a nasty haircut on the spread anyway).

Regards, Paul.

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peterthegreat 22nd Feb '17 22 of 22
1

Thanks for looking at Airea Paul. I'm glad there wasn't anything too serious that you spotted. I would agree that this is unlikely to attract the typical growth investor, particularly as progress is steady rather than fast and floor coverings is not the most glamorous of businesses. My thesis is that new management (since 2009) has proven itself by re-positioning the company to triple proft after tax and basic earning per share over the past 5 years despite revenues actually falling during this period. Having made the company more efficient, I hope they will now be able to grow revenues as well as profit on the back of the company's well-established brands, although they will need healthy markets for this. I also like the transparency of the company's strategy. However, I am sure you are right about this being a lobster pot share so certainly not one for the traders.
Best regards,
John

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 Are LON:TRAK's fundamentals sound as an investment? Find out More »



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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