Shares in software firm Tracsis has rebounded breached pass £5 per share. In under ten years, shareholders saw their original investment rise by 10 times. Today, we ask if there are further growth in Tracsis share price or will it take a breather. The only way to know is to assess their results and future outlook.
Let’s dive in.
What does Tracsis do?
Tracsis PLC helps to increase efficiency and reduce time in the transportation industry. It has two main divisions, which are explained below:
–Rail Technology & Services: Application software development and licensing, remote condition monitoring technology (RCM), and associated operational and strategic consulting services.
–Traffic & Data Services: Data capture, analysis and interpretation of traffic and pedestrian movement and demand volumes to aid with the planning, investment into, and ultimate operations of a transport environment.
SHARE PRICE: £5.20 (up 4%)
MARKET CAPITALISATION: £154m.
Tracsis saw revenue increased 6% to £34.5m (2016: £32.6m) and statutory Pre-tax Profit rose by 14% to £4.6m (2016: £4.0m).
Meanwhile, they increased their dividends by 17% to 1.4p per share (2016: 1.2p) and grew cash balance to £15.4m from £11.4m last year.
All while remaining debt free.
Net cash flow came to £6m, while net investing activities saw cash outflow of £1.75m. This is enough to build on business growth and cover their maintenance costs (depreciation: £799k).
Tracsis’s Historical Performance
A historical look at Tracsis is presented in the graph below:
Chart one: Tracsis operating margin, PER and MKT. CAP.
It looks as if Tracsis market valuation has raced ahead of time as their PER broke past 35 times earnings. Tracsis operating margin has fallen from a high of 35% to 12%. You should attribute this to business growth and acquisitions.
Next, we need to watch Tracsis labour costs trend because it is a software company which requires talent to stay ahead of their competition.
Chart two: Tracsis Wages
Tracsis’s costs per employee saw a steady decline from £40k to under £30k. Whether this is directly linked to their acquisitions, I am not too sure. But their overall wage bill accounts for an increasingly large proportion of the company turnover, as it rose to 55% in 2016 from 30% in 2012.
P.S. Data for 2017 isn’t available until they publish their annual report.
Now, onto the company’s cash balance.
Despite Tracsis two acquisitions made almost two years ago, Tracsis has managed to generate excess cash.
Chart three: Tracsis Cash Balance
From their latest report, cash balance rose to £15m in 2017 from £11m, mainly due to low acquisition costs.
If anyone manages to read their acquisitions statement, then Tracsis could face up to £9m in cash outflow, if their acquired subsidiaries meet their targets.
Given, Tracsis ability to generate excess cash, I see the firm absorbing this costs through a mixture of cash profit and cash reserves.
Finally, let’s look at the sustainability of their dividend policies.
Chart four: Tracsis Dividends
The level of dividends paid is small but growing.
If you observe the above chart, there is a declining trend in cash dividend coverage from 30 times to 20 times. It is still well-covered!
Also, if Tracsis has a bad year, then their cash reserve is sufficient enough to pay dividends 45 times over. Heck, the increase in cash can cover dividend payout by ten times.
For those who need a remainder of Tracsis acquisitions.
Tracsis made two major acquisitions last year.
The first is SEP Events Limited (“SEP”) an initial cash payment of £1.625m and the issue of 55,005 ordinary shares of 0.4p each in Tracsis at an issue price of 454.5p (a total value of £0.25m). The final acquisition price could reach up to £2.6m if performance metrics are met after two years.
SEP Events Limited has revenue of £4.0m, an adjusted EBITDA of £0.4m and Profit before Tax of £0.3m. Business is debt free, and has cash balances at completion of c. £500K, with tangible net assets of c. £600K.
The second acquisition is Ontrac Limited and Ontrac Technology Limited. It is an award-winning software development and IT solutions company that work with a range of clients in the transport, construction, and local government sectors.
The initial cash payment is of £11.5m. There is an Additional Deferred Consideration of up to £5.0m along with Performance Consideration of up to £3.0m is payable subject to Ontrac achieving certain financial targets in the two years’ post-acquisition.
After two years, maximum could reach up to £19.5m.
Ontrac generated revenue of £7.1m and adjusted Profit Before Tax of £2.4m.
Tracsis is a good and profitable business. The company see steady growth, but I do worry about their declining profit margin, given how fast the shares have risen.
Although management has said they will continue to integrate their acquisitions. I feel Tracsis is unlikely to make another big purchase until they settle their deferred payments. (totals of up to £9m, if targets are met)
At £154m valuation, I fell Tracsis share price is fair value and may trade sideways for the next 12 months.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.