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

21st Feb '17 by Paul Scott

22 comments 17943 reads

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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Howard Adams

21st Feb '17

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

Paul Scott

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.

bobo

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

rustle2

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

gus 1065

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.

peterthegreat

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.

andrea34

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

rhomboid1

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!

Ramridge

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% .

Andrea

Thanks for your point.

Regards
Howard

drvodkaquickstep

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.

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

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.

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

marben100

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

JMLDutch

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.

nhb001

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

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,

22nd Feb '17

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.

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

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

Trakm8 Holdings (LON:TRAK)

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Paul Scott

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