Stockwatch: An AIM share reasserting growth credentials?

Is Trakm8 (TRAK) re-asserting growth credentials after a brief but messy period of warnings?  Does its stock also reflect trend-following on the less-liquid AIM market?

This telematics and data supplier (e.g. for lorry fleets) soared from 11p in 2013 to 385p by end-2015, then slumped through 2016 apparently to a turning point this last March at 65p. That bottom was linked to a same-price placing that raised £2.1 million in support of the balance sheet.

At 118p currently, Trakm8 is a £42 million company with a normal market size of 2,000 shares. It entertained an annual average historic price/earnings (PE) ratio of around 30 times in 2014-15, and, indeed, earnings grew very strongly in this timeframe.

But the last six months have seen sharp downgrades - with finnCap, the company's broker, cutting its pre-tax profit forecasts from £5.9 million and £7.2 million for the 2017/2018 financial years (to end-March) to £1.0 million and £3.0 million respectively.

Yet unraveling the issues shows they mainly relate to timing and investment than lack of appeal of Trakm8's technology. That was recently affirmed by insurers Young Marmalade and Direct Line extending their telematics contracts, and new ones with a roadside assistance company to supply devices and data, and also a construction equipment supplier.

Messy warnings

Admittedly, there's a sense the board should have been clearer earlier on, or didn't have a grip on what was engulfing it, or, more charitably, events are symptomatic of young growth businesses.

I initially drew attention last October at 152p after a non-executive director bought 20,000 shares at 200p following a 7 September AGM update, citing new orders up 37% in the first five months of the current financial year, with 27% organic growth.

There was caution about how results would be second half-year weighted, and I noted the chart implied waiting for a support level to get established, although with hindsight "second-half-weighted" was a gloss on profit warning no. 1.

The stock fell to 126p after the end-November interims clarified operating profit down 61% to £589,000. That was blamed on weaker sterling increasing the cost of components priced in US dollars, higher sales & marketing costs, and engineering challenges with three major new product lines continuing to defer revenues - although they did rise 12% to £13.2 million even so.

The theme of contract drift continued, effectively with profit warning no.2, flagging potentially flat profits on higher revenues; but also that, after a change of chief engineer and hiring additional support, progress on project delivery was said to be "excellent".

Thus, when citing Trakm8 in my December year-end review of stocks, as a disappointment of sorts, I suggested that at 115p it was potentially a recovery play for 2017. Lumpy revenues are a dilemma but Trakm8's innovation is respected hence patience a virtue.

Brief capitulation on profit warning no 3

The stock fell again in response to a 21 February update in respect of the March year-end, with profits continuing to be compromised by delayed orders and a shift in the business model (also pushing revenues forward), thus "a consequent impact on cash flow and indebtedness."

The story was now one of balance sheet risk, hence a placing that raised £2.1 million with the directors putting in £800,000, a good sign. In a cost-cutting effort, £1.5 million annualised savings are said to be achieved (mainly by consolidating activities) at a one-off cost of £130,000.

The barrage of issues arising has looked as if the story has got too problematic, but the stock's recovery and busy news-flow of contracts is re-asserting a growth theme.

A final update in respect of the March year-end, on 28 April, cited like-for-like revenues up 7%, recurring revenues up 18% to £9.8 million and new orders up 37%, benefiting 2018 and beyond.

Year-end net debt had risen from £1.1 million to £3.9 million, even after the £2.1 million placing. Significant investment has resulted in "our widest ever range of innovative products and solutions - e.g. a new integrated camera, telematics and insight portal - with our strongest-ever customer base and deepest order pipeline...excellent market reaction over the past few months but later than originally expected."

Latest contracts affirm technology strengths

Management's claims are supported by progress this last month. On 4 April, Young Marmalade, a UK vehicle insurance company targeting younger drivers, announced a contract extension valued at £1.7 million; and on 3 May Direct Line renewed a three-year contract representing a significant aspect of the 110,000 devices Trakm8 has deployed in insurance applications.

Then, on 24 May, an initial contract was announced with "a roadside assistance technology," providing a number of devices for initial launch this July plus integration engineering fees - the initial focus being the UK and Holland, with roll-out more widely in Europe to follow.

While nothing was quantified, the executive chairman said: "This contract is expected to be a significant one and provides additional visibility for our expectations for this financial year and beyond."

Currently, on 30 May, an initial contract was announced with Mecalac Construction Equipment (previously Terex GB) for a minimum 2,000 units over the first three years from this June, with products being sold to Mecalac customers worldwide.

The latest generation T10 telematics device is involved and the client says: "We've seen customer demand for telematics capability increase significantly. By partnering with Trakm8, we can now offer a market-leading, proven solution for customers around the world."

That's a key endorsement for Trakm8, able to help shift investor perception towards roll-out potential after recent woes.

2018 earnings forecast looks conservative

On the basis the company has learned from this briefly challenging period, its underlying growth trend in installations and revenues should be re-asserted, thus £3 million pre-tax profit being a fair target by finnCap for the current financial year.

However, the March capital-raising involved a total 3,230,770 new shares or 10% dilution, implying the broker's 2018 EPS target of 6.7p is modest. On the basis of about 8p, the PE multiple nears 15 times, fair enough after recent frustrations, but itcan rise with consistent underlying progress.

Prelims are due on Monday 2 July when an update on trading will be provided. While some may wait to see evidence that the stock looks likely to continue to rise - up 5p on the Mecalac contract - a talked of bulging pipeline could deliver more good news.