LON:TRAK | TRAK - Huge Downside Or Huge Opportunity?

18th Nov '18 by AnonymousUser226237

23 comments 3916 reads

Since the Group's trading update announced in September 2018 it has become clear that the improved H2 financial performance, driven by continued growth in the telematics business, will not materialise as the Group anticipated. Continuing delays in decisions by customers is preventing the return to the usual levels of success in Fleet and Optimisation, a move to a rental model in the automotive space, and the loss, due to sanctions, of a multi-million-pound contract for the supply of Insurance solutions into Iran, has meant that revenue for the current financial year is now expected to be 20-25% below the FY2018 outcome, and 10-15% below on a like-for-like basis.

OUCH! I did not see any of this coming and many can say John Watkins on his September interviews and AGM statement was borderline fraudulently when he presented a much different picture. The market hated the surprise and punished the company exceedingly, bringing it down to levels seen in micro-caps with no sales, profits or history of success. RSI is now 11 and the market cap is £8m...in any sane criteria an insane valuation for a company that is market leading in telematics with a huge client base of blue chip customers and contracts across the world.

IMO a huge bounce is on the cards here for Trakm8 Holdings (LON:TRAK), the market panicked wildly for a 20% drop in revenues, which is just a blip. We already knew they would be down on revenues and profits for H1 and it was the unexpected loss of the Iran contract that caused the profit warning. (Thank Trump's sanctions for this when all of EU agreed to keep working with Iran)

This is a company that has the third biggest market share in telematics in the UK and a notable and growing presence in Europe and Australia. It has undoubtedly the best telematics technology in the planet!! And some of its clients are names that any rival would kill to have:

AA / ANWB and 4 more road clubs in the EU (OAMTC Austria going live in February)
Direct Line
Lexis Nexis
Bt Fleet / EE
Intelematics
St Gobain
Scottish Power
Iceland
EON

Lexis Nexis is about to start massive volumes, AA is already offering the Car Genie with every renewal and might make it mandatory for its 3.3m customers while also starts…

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Gromley

18th Nov '18

"As a supplier with sufficient financing in place to meet the challenge in the market, Trakm8 can secure contracts others might not be able to finance. "

You've prompted me to have a further look here next week, but I have to say that my first reaction to the comment quoted above, was to think that it means they can afford to take on contracts that have such a poor risk profile that other would not entertain them - easy to win market share by securing unprofitable contracts.

That's a completely throwaway line as I haven't checked, but that was my initial reading.

AnonymousUser226237

Thanks for your comment Gromley.

I doubt Lexis Nexis, one of the biggest private intelligence companies in the world is a unprofitable contract. The same for BT Fleet/EE with their B2B offering or Intelematics in Australia. These are quite significant contracts with big potential for scale. I don't doubt some contracts might be close to break even, when you build scale you get to have these too. Direct Line doesn't seem like much at the moment for example, intake seems very low.

If the Iran contract had not failed due to sanctions, TRAK would have met all current expectations and profits would be nicely on the up. Combined with Brexit, the company got hit with a double whammy. I think this was extreme bad luck and they'll get past this, with this being just a blip.

As always, with a new significant contract it will be easier to see the investment case here. Calor Gas, FMG, Iceland etc have all done heavy investments in the Fleet side recently and those recurring revenues will soon have broken even and be very profitable. Fleet devices going up to 77,000 is very encouraging.

Time will tell.

pgs501

19th Nov '18

Hi Blondeamon,

Thanks for the write up. To me the market has priced this company as one for which there is a genuine chance of bankruptcy / heavily discounted large share placing wiping out current shareholders. Whilst I largely agree with your belief that this is a business that should have a future the balance sheet seriously worries me with negative NTAV and a loss expected this year. I also note the Altman Z score of 1.2 which adds to the worry. They had £2m of cash as at 30 September and that will likely be decreasing over the next 6 months given they are expected to make a loss over that time (even if there are no further issues that come to light). A revenue drop of 20-25% as stated today is pretty brutal and could lead to a really large cash burn (further than has happened in H1).

It looks to me like a placing may well be required and given that it is just too high risk for me. I will put it on my watchlist and should they update the market with new wins and further detail about the cash position backing up your theory I would then take a small position, enlarging should price momentum back it up. Should that all happen I agree that the current sp is extremely low for this scale of business.

I am reminded of a tweet I read recently: All stocks that dropped 90% first dropped 80%, and then 50% from there.

willhampson

Thanks for the write-up Blondeamon, an interesting read. I really can't add much from what the others have said, but I think the point you are missing is that they will need to fund raise in the not too distant future. My suspicion is that is the cause for the huge sell-off as that could be (I hope not) a fairly ugly proposition in the current volatile markets.

DWit199

The Beneish M score of -1.46 is flagging a high risk of earnings manipulation, largely due to a disproportionate increase in receivables. Is there a plausible explanation for the increased receivables in the 2018 accounts?

Hi blondeamon,

I doubt Lexis Nexis, one of the biggest private intelligence companies in the world is a unprofitable contract. The same for BT Fleet/EE with their B2B offering or Intelematics in Australia. These are quite significant contracts with big potential for scale.

I think it is dangerous to equate the quality and size of customers with the profitability of contracts sold to them; if there is a correalation at all it is probably inverse.

I have been mulling over what the statement on financing actually means.

"As a supplier with sufficient financing in place to meet the challenge in the market, Trakm8 can secure contracts others might not be able to finance. "

Presumably they are saying that there is an upfront cost (investment) in undertaking these contracts which is then recouped later in the process and that they have financial resources to make these investments where as competitors do not.

It strikes me that if these contracts are profitable and offer a good prospect of success, then competitors would not have much problem securing financing from somewhere. If, however, they are relatively low margin and subject to risk, then it would not be so easy to finance them.

So are Trakm8 Holdings (LON:TRAK) implicitly telling us that they have a greater appetite for risk than their competitors?

We cannot really know the answer to this of course, but there are in my mind a couple of possible warning signs to be seen.

According to the Stocko figures, Operating Margin has been declining over the last couple of years 12.1% in 2016 down to 2.1% in year ending Jan-18). Similarly ROCE has been in decline (14.5% down to 2.2%).

Taken together with the statement on financing, these might be suggestive of pursuit of growth at all costs.

There is in any case I believe an inconsistency in the statement on financing; the inference is clearly that there are significant upfront costs/investments associated with new contract wins, however the accounts show net debt at £5.73m (gross debt at £7.73 offset by £2m cash) and an undrawn facility of only £0.3m. So in the short term only £2.3m of available cash (less in fact as part of the debt is payable by instalments), which doesn’t seem to me consistent with the view that they have a competitive advantage in being able to finance new business – at least not in the short term.

So I would say that there is at face value a reasonable change that they will need to raise additional funds to invest in further growth.

Tangentially, there is one other inconstancy in their numbers, imho, they state that : “Gross profit margin has reduced to 43% (H1 2017: 46%). This is due to the relatively fixed labour costs during a period of low levels of device build.”

Fixed labour costs should not be included as part of Cost of Sale (certainly not without taking in to account “utilisation”) to it seems to me they actually understate their Gross Margins against what I would ordinarily expect to be the case. I’m not sure that this should change one’s view on the investment merits here, but it is a puzzle nevertheless.

Overall then, I’m afraid I can’t see the investment merits here at this time.

Not for me!

Thank you all for the comments today, glad to see it kicked off a nice discussion.

Trakm8 Holdings (LON:TRAK) is definitely not a safe bet, far from it. But I think it has not been clear that the reason they are in this mess is because they take all the financial hit to pre-make all products for their customers before the demand is there. That is why they are working down launch stocks still...their customer overestimated the demand and TRAK ended up almost going bankrupt because of it. Quite a tragic business decision by JW.

On the positive note, I believe that is why their cash was wiped out like that and that the next months will not have such costs but only revenues/profits from the sales of all those devices they took a hit from building in advance. The recurring revenues will go up and the money for those devices will start to flow in at H2.

I am a firm believer they will put this behind them and they will surprise with some new contracts soon. The wise thing is to wait and see if this pans out first, so tread lightly but I am still very positive on the outcome even if management screwed up massively this H1.

AnonymousUser252054

All things considered I think Trakm8 Holdings (LON:TRAK) should have accepted the contract in Iran. It would have been perfectly legal and over the summer the government had actively encouraged businesses to keep trading. What exactly could the US have done to them?

Sanctions is a tricky thing, you don't want to get caught on the US list of naughty companies. It is utterly insane that all of the EU is doing business with Iran but Trump threatens retaliation for any company that goes ahead. C'est la vie.

20th Nov '18

If any country apart from the US had threatened us in that way we'd likely as not be at war with them now. It's a pivotal moment in British history, and to acquiese with barely a murmur.

Wimbledonsprinter

This is not a company that I have looked at before and not one that I could see myself investing in short-term. The cash-flow situation looks very tight with, as mentioned above, only £2.3m of available cash resources and an H1 cash burn of £2.1m. In addtion, there are more than £6m of trade payables on the balance sheet and given the situation, if I were interested in investing, I would want to get a better understanding what this really is and if trade creditors can also put financial pressure in the company.

The positive is that the 12 month going concern statement in the half-year results is short and straightforward. There are no caveats about financing. Therefore, if you feel you have a view of value that can be placed on this statement by the directors, then this could be reassuring.

jonesj

This has already lost over 80% so far in 2018.
I would want to see meaningful director purchases before looking at this more seriously.

Howard Marx

The directors participated in the last placing 18 months ago, at 65pence/share,

I seriously doubt they have any more idea of the direction of future profitability nor the share price than the average investor.

The company needs to advice the market on whether any covenants have been breached or not or if it's in danger of doing so. If not, the shares could jump fast and the market can be reassured. If they are, then an expedited equity placing or similar will be needed.

In any case, they must inform the market sooner than later. To try and be more positive, the CEO's statement about they being 'able to finance deals competitors can't' and the going concerns not mention any finance issues are both on the plus side.

rhomboid1

I think it’s impossible to envisage a realistic covenant they could be compliant with on the reported numbers so given directors clean (but as per normal non-audited) going concern statement there are 2 binary options:

1 current trading is cashflow positive

2 directors don’t want to face reality

I’m unable to buy the shares on that basis

Albertos

22nd Nov '18

Market Cap is now £5.9m.

The market is basically pricing in Trakm8 Holdings (LON:TRAK) either going to the wall or issuing shares in a massive dilution - at best this is a watch situation - and suggests the market doesn't believe a word the directors say.

Have to say I agree with the market.

Zipmanpeter

6th Dec '18

Re-posted my from SCVR on 6/12/18 as on reflection wanted to add to this thread to keep all TRAK stuff together)....

Thanks to rmillaree for notice of equity raise by Trakm8 Holdings (LON:TRAK) This was predicted on separate, well researched dedicated thread on TRAK and for me now makes TRAK look a good if still risky bet.

TRAK has declined from >100p for most of the last 18months, to around 60p at interims in Aug to around +/-20p now. This recent decline has mostly IMHO been based on the risk of it running out of cash as it transitions to a pure telematics business and following a bad 6 months of UK sales plus one off impacts of exit from contract work and loss of contract in Iran and more generally the overall market sell off. It has just recently brought a lot of new products to market and has some great customers and supporters like the AA, Direct Line and Iceland as well as a decent less glamourous but probably more profitable set of SME customers.

The equity raise by Trakm8 Holdings (LON:TRAK) announced today will see 10Mn shares issued priced at 22p (gross proceeds £3m but company gains net £2.2m) . This will provide cash to be used ‘primarily to fund general working capital requirements’ as it scales up and invests in automating its local production of telematic devices.

Interestingly, the shares will be taken up by Micolise Ltd and TRAK Directors. Microlise, who will have 20% of the shares if the deal is approved is a private UK owned telematics company headquartered in Nottingham whilst TRAK is based in Birmingham. TRAK CEO John Watkins, other DFounder Directos and, most meaningfully the TRAK CFO, Jon Furber will also participate. Watkins (family)/Founders are all in but Furber is taking up 540K shares ie £119K of his own money.

Microlise Ltd are especially interesting as they are larger but similar in size to Trak overall (2017 revenue £45Mn vs TRAK at £29Mn) and claim to be mostly non-competing being focused on UK HGV market.

Some £43Mn of Microlise’s £45Mn turnover, in accounts to June 2017 filed at Companies House, is in the UK but no split is given between HGV, Light commercial vehicles (TRAK current base) and automotive/Insurance (TRAK's aspiration). Microlise also have offices/operations in India, Australia, UAE and France and TRAK’s PR puffery talks up the opportunity for complementary reselling and sharing of resources as it seeks to internationalise.

Microlise also look more stable and profitable than TRAK having made solid profits of on revenue of £2.1 on £45Mn in 2017 (and £4.3 vs on £37Mn in 2016). This included £1.2mn to set up in India. Also, and unlike TRAK, 100% of R&D expenses are written off in the year they are incurred and they spend £4-5Mn ie similar to TRAK . External bank loans >1 year was only £1.1Mn.

Given the high fixed and R&D costs involved, in a sensible world Microlise and TRAK might further combine down the line combine further, keep TRAK’s listing and make significant direct savings whilst providing a better, wider service to big customers - a much more attractive investor proposition. TRAK also make big claims about their tech – if true this is a fast route to using on more vehicles and building all important scale.

This might also be a way to ease out / downweight weaker key managers and bring in a more normal, less family orientated management structure at TRAK ie replace the COO Mark Watkins, son of CEO John Watkins or Watkins himself who might otherwise have gone if TRAK were not his baby, given results of last couple of years.

Egos, politics and potential impacts on key individuals will probably get in the way but there is a lot to go after.

Having watched TRAK's price descend for a long time but still seeing the potential, I finally took the plunge today and bought at 20p, hoping that TRAK now have the time and cash to move to solid scale profitability, including completing their factory build and emerge profitably into whatever the post Brexit world has to offer them.

Nice cover above, Microlise seems like a hell of a strategic partner and it's their own CEO who joins the board of TRAK as a NED, which is very encouraging.

15th Jan '19

Blondeamon,

TRAK is edging back up from 16p nadir (now 31p at 15/1/19) on tiny volumes ahead of meaningful new info released to the market and despite wider market declines. I'd like to do a deeper dive into market structure and competition to see if it worth a further (risky) investment in the short run to benefit from a bounce when better results are announced with finals and possibly as a longer term bet if I am convinced they have a genuine advantage in technology.

Frankly my biggest concern is the CEO Watkins is a good salesmen to, and has focused on, selling to usually neglected private investors. To help me do this, do you have a list of the top 5 competitors in the UK ideally for 3 sectors ( HGV, light commercial vehicles, cars) or access to any independent data on market share / trends.

FWIW, personally, I view European / ROW roll outs as a bit of a vainglorious distraction until they win bigger in the UK. They are too small to fight on many fronts.

16th Jan '19

Depends on what front. On Fleet you have Masternaut and Quartix in the UK and TomTom, Verizon globally. Dozens of small ones as well.

On the Automotive, TRAK is basically the only serious player Europe wide with many Road Clubs and Intelematics.

On Insurance, TRAK has Direct Line, Marmalade, Lexis Nexis, Smartclub contracts while other smaller players have Hastings, Carrot, etc

Microlise was not a competitor as they were in HGV but by partnering with them they gained access to a totally different clientele that could benefit from TRAK's 4G cameras, ADAS features, vehicle monitoring and brand new small, high-tech devices.

Telematics is a crowed space and TRAK might be suffering share price wise but their technology is second to none, I still haven't found a 4G telematics camera that comes with route optimisation, ADAS and full telematics capabilities anywhere.

TRAK - huge downside or huge opportunity?

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AnonymousUser226237

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