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Stockwatch: A contrarian's dream AIM pick?
By Edmond Jackson | Tue, 1st November 2016 - 10:55
Shares in this telematics and data supplier soared from 11p in 2012 to 385p by end-2015, trading on an annual average historic price/earnings (PE) multiple of 20 to 30 times. It has since slumped to 152p with the forward PE now in single figures, if forecasts are credible.
Such a drop shows the risk with growth stocks on high multiples priced for perfection. The market doesn't usually lack enthusiasm when pricing growth extravagantly, especially with so much cash swilling around equities.
So why do sellers weigh on the share price? They have already caught out a non-executive director who bought 20,000 shares at 200p after the AGM in September. Then, a trading statement cited new orders up 37% in the first five months of the new financial year, like-for-like, of which 27% was organic growth.
The stock has fallen pretty much throughout 2016, making the five-year chart look appalling, but perhaps encouraging the proverbial "knife-catching". So, let's consider the overall context.
When the stock peaked at around 350p by end-2015, company broker finnCap raised its target from 318p to 425p. However, this was just a finger against the wind of sentiment and the trend promptly reversed down. The only explanation can be concerns about valuation, as there is no evidence of any financial shortcoming.
A trading update for the March year-end revealed no glitches or caveats, and prelims looked impressive: 28% organic revenue in context of 44% overall. Around £10.4 million was spent on acquisitions, financed by a £6 million equity placing and strong cash flow/conversion.
The progression of cash flow growth (see table below) was underlined by a maiden final dividend of 2p. The operating margin has soared from 1.7% to 14.5%, and net debt at end-March was just £1.1 million.
Profits will be weighted to second half due to the accumulation of reporting units So, the key statistics are good compared to other AIM-listed stocks, and even when pitted against growth companies on the main market. Contract wins have since continued and a strong pipeline is building.
Looking at the one-year chart, Trakm8's price was at 230p around the results and traded 197-300p until 7 September, when the AGM statement maintained the growth theme.
But there was a twist in the form of a profit warning. Profitability will be weighted to the second half due to the accumulation of reporting units and order deployment timings.
"Half-year profitability is expected to be less, like-for-like, with a stronger second half," the company said.
Management also cited a £500,000 increase in component costs due to the fall in sterling, mitigated somewhat by rising overseas sales (the UK represented 97% of 2015/16 turnover).
Does this throw finnCap's £5.9 million pre-tax profit forecast for the current year in doubt? The target was only issued on 8 September and was likely signed off by the finance director as within budget, but could 169% of upside toward its 425p target price be too ambitious?
Contrarians average in
Most likely it's a combination of the terrifying chart and no prospect of another update until interims in a few weeks' time which has led to price erosion - likely enhanced by stop-loss selling.
On a chart basis you would wait to see a support level establish, lest warning number one was a mealy-mouthed way of saying business is more challenging. If the forecasts are broadly correct, however, the price/earnings-to-growth (or PEG) ratio is substantially below 1.0, a benchmark for value with growth stocks.
So unless Trakm8 proceeds to warning number two, in whatever guise, the interims are likely to aid a re-rating. Contrarians would more likely view the chart as a combination of market-technical factors and consider the 24% discount to the non-executive director's buying as a low point. In which case, better average in.
The five-year table reflects a chief risk that value hinges on continuing the ramp-up in profitabilityThe industry context looks positive. Telematics is an established feature of vehicle fleet management and insurance industries, and Trakm8 is of a size that can achieve double-digit financial growth. That's why its share price drop is interesting.
The five-year table reflects a chief risk that value hinges on continuing the ramp-up in profitability. Yet the acquisitions enhancing the growth trend look strategically suitable to achieve a complete telematics solution, including dashboard cameras.
The December 2015 purchase of Route Monkey has introduced routing and scheduling solutions, although mind how it was mentioned at prelims; its performance wasn't good enough to trigger any of the £2.0 million deferred consideration above the £5.04 million purchase price.
Trakm8 has an executive chairman that splits his office between chief executive and "independent" non-executive chairman, but I wouldn't worry about that for a circa £50 million company. He owns 17.8% of the business, the finance director holds 6.6% and two other executive directors own 4.9% and 5.7%.
Shareholder Gervais Williams isn't immune to mistakes but normally kicks the tyres wellAltogether this should be good incentive to create a strong business and potential long-term bid target.
Telematics will likely get more competitive, but Trakm8 looks to have a good position offering a complete solution to customers such as the AA (AA.), Saint Gobain (COD), EON (EOAN) and Direct Line Group (DLG). Linking the services like dashcams and route scheduling would appear a competitive advantage.
Gervais Williams' Miton Capital Partners also owns 3.8%, which should be taken as a nod given the fund manager has outperformed his peers since the 2009 recession.
He isn't immune to mistakes, but usually kicks corporate tyres well and, should difficulties arise, he is more likely to stay the course, being pro-active. This may help contain risk for smaller shareholders fearful of AIM's reputation.
For more information see the website.
|Trakm8 Holdings - financial summary||Broker estimates|
|year ended 31 Mar||2012||2013||2014||2015||2016||2017||2018|
|Turnover (£ million)||5.22||4.75||9.19||17.9||25.6|
|IFRS3 pre-tax profit (£m)||0.08||0.04||0.4||1.7||3.0|
|Normalised pre-tax profit (£m)||0.08||0.04||0.8||1.7||3.6||5.9||7.2|
|Operating margin (%)||1.7||0.9||9.4||9.9||14.5|
|IFRS3 earnings/share (p)||0.7||0.8||1.9||5.5||10.3|
|Normalised earnings/share (p)||0.7||0.8||3.7||5.5||12.2||15.7||18.0|
|Earnings per share growth (%)||-34.6||14.3||356||50.1||122||29.2||14.6|
|Price/earnings multiple (x)||12.5||9.7||8.4|
|Annual average historic P/E (x)||19.6||26.4||28.2||30.0||28.4|
|Cash flow/share (p)||0.6||2.6||8.3||3.9||14.5|
|Dividend per share (p)||2.1||2.2|
|Covered by earnings (x)||7.5||8.2|
|Net tangible assets per share (p)||7.3||8.7||7.0||11.6||9.6|
|Source: Company REFS|
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.