Edmond Jackson's Stockwatch: Torotrak primed for a successful 2014

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It is interesting to note directors' buying of the FTSE Fledgling shares in Torotrak via an 18p a share placing and open offer to raise £16 million.

This has enabled the acquisition of the outstanding 80% of shares Torotrak didn't own in Flybrid, a company that has developed a small and light flywheel system to store kinetic energy absorbed when vehicles brake.

Two ex-Flybrid owners look to be maintaining their equity, respectively buying 5.5 million and nearly 2.4 million shares however four other Torotrak directors have bought a total £175,000 worth of shares which demonstrates confidence.

Possibly you recall how Torotrak was a darling of the 1999-2000 tech-share boom as hopes soared over potential for its "infinitely variable transmission" technology to replace conventional gearboxes.

Reality proved a reminder how new technology can appear to make revolutionary sense; but whether manufacturers will commit to it is another matter.

Luxury cars, off-road vehicles and buses were entertained as prospects, however the company had to re-focus towards making vehicles more efficient with reduced emissions, and its financial record (see table) shows a struggle to break revenue out of a sub-£10 million range with ongoing modest losses.

At end-September 2013, Torotrak had £6.7 million cash with negligible debt; and the interim cash flow statement showed £1.8 million net cash absorbed by operations; so possibly the acquisition of Flybrid is a defensive developmental move to gear up operations with "something new" than eventually have to tap shareholders again albeit with legacy technology.

Well-positioned to meet targets

In fairness, management says it is well-positioned to help vehicle manufacturers address tough new carbon dioxide emission targets being introduced globally - with a market window from 2015 to 2020 as vehicle platforms require updating.

The 2 December results for the six months to end-September 2013 claimed prospects had strengthened in terms of technology uptake - citing "high levels of engagement with multiple prospective licensees and customers... in passenger cars and off-road vehicles" with at least one agreement anticipated with a manufacturer this year.

Coincidentally, at about 20p to buy in the market, Torotrak is down at its longer-term support level which capitalises the group at about £54 million with 274 million shares issued. This is not a massive amount to dilute earnings as can happen with repeat capital raisings.

A latest video on the company's website provides a good overview of the technology involved, offering fuel savings up to 25%.

At interims reporting the chief executive said: "I have no doubt that the new enterprise formed by the combination of Torotrak and Flybrid can be a catalyst for the adoption of our technologies in new car platforms post 2015 when mandatory CO2 reduction targets tighten worldwide.

"This, and our investment in low volume manufacturing to launch Flybrid's M-KERS in the UK bus market next year, gives us excellent opportunities for substantial value creation in the short, medium and long term."

Been round the block before

Mind how Torotrak's previous story appeared similarly compelling to shareholders who test-drove vehicles fitted with infinitely variable transmission (as supplied by the company at shareholder meetings). The existence of a Torotrak Private Shareholders Association of 593 members hints at the collective response to cope with frustrations.

This is both the problem and opportunity surrounding Torotrak: a company that has "been round the block before" as the stockmarket adage goes, with followers feeling they have seen enough false dawns, yet there is genuinely "something new" in the technology offering.

So Torotrak's market value is not extended but at a lower end of its five-year range. It could be judged in terms of "replacement value" or Tobin's q, i.e. the investment required to establish such a group also the time involved, for even Flybrid is a six year-old company.

While there is always a risk of rival technologies and progress remains speculative, the group now looks to have a strong offering. Proceeds of the latest share issue will also be applied for commercialisation of Flybrid's technology and to enhance Torotrak's testing and engineering capabilities.

With news of technology adoption the shares are likely to re-gain interest even if takes several years to establish an earnings record. Their normal market size of 10,000 makes them responsive to news but not illiquid either.

A 16 December 2013 forecast from N+1 Singer, Torotrak's broker, anticipates losses widening from £2.2 million projected for the current year to 31 March 2014, to £5.5 million - which has likely been signed off by management, i.e. accords with latest budget.

It is also worth pointing out that Allison Transmission Inc, the world's largest manufacturer of automatic transmissions commercial and military vehicles, is a 13% strategic shareholder, has subscribed for the recent offer and could acquire the group if it makes more progress.

While it appears premature to set a price target, the company looks well-positioned at a time when cleaner vehicles are becoming a necessity; so if management can finalise at least one worthwhile agreement this year then 2014 should favour upside for Torotrak.

For more information see torotrak.com.