Trakm8 Holdings has reported a doubling in operating profit to £806k, while sales saw a modest rise to £14.75m from today’s interim results.
Is this the beginning of Trakm8 share price recovery?
Trakm8 Holdings Brief Introduction
Trakm8 is a technology leader in fleet management, insurance telematics, optimisation and dashboard camera systems.
It essentially helps monitor and record the location of company vehicles to improve the efficiency of managing their fleet.
It also helps insurance companies to monitor car insurance regarding payout and damages.
For more about the business, see HERE.
Let’s begin with their Trakm8 share price.
Trakm8 Share Price debacle
The history of Trakm8 share price pattern is similar to your typical “pump and dump” story. Below is Trakm8 Holdings 5-year share price history.
Currently, the share price has more than doubled from their lows before recovering to £1.43.
From a technical analysis point of view, Trakm8 has broken past the 50-day moving average and is targeting the 200-day moving average. A break above the 200-day moving average could give Trakm8 share price the momentum to go higher.
Trakm8 Contract Wins
Today’s interim results and the response from the market which has sent the shares higher by 2% have suggested the company is doing something right.
And one thing it is doing right is winning contracts and getting these contracts renewed or extended. This helps Trakm8 to increase recurring revenue by 17% to £5.48m from £4.69m.
Starting with their contract wins, these include:
1). Allianz Awards; – an initial order to supply 5,000 devices to start the pipe filling for Allianz Insurance telematics in China.
2). Smart Drivers Club; – an 18-month contract with an order for 6,000 devices in the current financial year, a period relating to year-end March 2017.
3). Roadside Assistance Technology; – the contract is set to launch in July 2017 and Trakm8 will provide its latest generation Connect 300 plug in telematics device. Although there is no financial disclosure.
4). Mecalac; – It will supply a minimum 2,000 units over the first three years, will commence from June 2017. Trakm8 will provide the latest generation T10 telematics device.
5). Calor Gas UK; – it’s to supply the RoadHawk 600 integrated camera and telematics solution. The contract is valued at in excess of £1.3m and the units will be deployed during 2017.
Here are Trakm8 Contract Extensions: –
1). Young Marmalade; – it is to supply T10 Micro hardware and data services. The contract extension is valued at £1.7m.
2). Direct Line Group; – it awarded Trakm8 with a three-year extension lasting to 2020. Trakm8 has direct line has contributed to the 110,000 devices delivered.
3). Iceland Foods; – The new contract extension will run until April 2024. Trakm8 helps deliver “RoadHawk 600″ integrated 4G video and telematics solution for Iceland.
4). Shell; – is to expand the development of its Smart Charging solution. The contract extension will provide Shell with a capability to manage and optimise the charging of electric vehicles, initially for the US market.
Although these contract wins and extensions are impressive, we got to keep things in perspective. Trakm8 has delivered 190,000 units of devices in 2017, but have this translate into profitability?
Trakm8 Holdings Operating Margin
We can say that Trakm8 has seen a rise in turnover, but what about profitability?
The graph tells us that profitability was rising up till 2016 (12%), before crashing to 3%. Referring back to Trakm8’s share price, back in early 2016, investors already knew valuation was too high to sustain and so the sell-off began.
A year later, the share price bottomed in early 2017, as the company reported a collapse in earnings and margins. Then the share price mounted a recovery. “Are we going to see a recovery take shape?”
Today’s results see operating margin rising to 5.5%, but we will need the full-year results
Be cautious of Trakm8 Capitalised Development Costs
There have been some concerns from investors that Trakm8 Holdings has been “Capitalising” their costs as part of intangible assets. Since 2014, the net book value of Trakm8 development costs rose from £0.8m to £5.26m in 2017. To analysts, this is alarming because these costs should be expensed on the Income Statement, rather than classified as an asset. That leads to profit getting overstated!!
There are two ways of checking excessive “Capitalisation.”
1). Evaluating Trakm8 “Asset Turnover”
Ignoring the period 2005-2010, we see Trakm8 asset turnover fell from 1.1 times in 2015 to 0.8 times in 2017, a decrease of 27%. Meanwhile, Trakm8’s equity rose from £7m to £20m in that period.
A fall in asset turnover leads to diseconomies of scale or costs capitalisation. Either way, it suggests that Trakm8 assets are not producing the same level of sales per unit.
Then you see rising shareholder equity.
It’s like management has solved two problems with one stroke. One problem is how to increase profit (by capitalising costs) and the second problem is how to increase shareholders’ equity (by turning capitalised costs into assets). And the stroke is turning costs into assets through capitalisation.
Also, development costs are part of the reason why equity has risen, we shouldn’t forget £10m worth of goodwill is the main contribution.
2). Comparing the “Increase” in development costs vs. “Operating Profit”
Since 2010, Trakm8 has seen development costs rose to £5.1m, while all the operating profit ever made in that period totals £6.9m.
You could that by capitalising development costs, it helped boost profits by £5.1m or 74% of all operating profit made since 2010!
Evaluating today’s interim results
Since I’m having difficulty integrating today’s results into this article, below is a brief summary.
Trakm8 reported an increase in revenue to £14.7m, as operating profit shot up to £806k from £362k, as well as Basic EPS rising to 2.97 pence from 0.88 pence.
Looking at Trakm8 divisions, their solutions division saw sales grew to £12.48m (2016: £9.69m), whereas Product Sales amounted to £2.27m (2016: £3.49m), a reduction of 35% on last year.
Also, they managed to increase recurring revenue by 17% to £5.48m. They have an undrawn credit facility of £3.7m at HSBC, as of 30 September 2017.
Management remains optimistic about the second-half by stating they have visibility to support our second half expectations because of substantial new contracts in place. The Board remains confident that the market expectations will be met for the full year.
Financials in Detail
Although net assets rose to £21.37m from £20.23m, this can be attributed to rising intangible assets of £18.1m from £17.1m.
But, the greater than expected net cash profit was attributed to the following:
1). Income tax awarded for R&D tax credit of £1.64m;
2). A cash inflow of £200k from movement in working capital, compared to £1.2m cash outflow last year.
Net debt improved to £2.32m from £4.4m, helped by a £2m placing and supported by higher than expected net cash profit.
There are two things that concern me, these are:
1). Dividends haven’t been mentioned and
2). Capitalised development costs rising to £1.76m from £1.45m because there is no explanation what constitute these costs. But the company did capitalise £300k of engineering, sales and marketing expenditure.
Final Thoughts on Trakm8 Holdings
Although Trakm8 has won numerous contracts but is the quality of their profits has me concerned.
What is in these development costs are unknown, but Trakm8 did reveal that some of these costs include engineering, sales and marketing expenditure. Whether it constitutes the classification towards an asset is debatable.
Anyway, Trakm8 market capitalisation stands at £61m at £1.41 per share.
Right now, I have no opinion of where the share price will go because of my concerns over the quality of earnings. But it wouldn’t surprise me if investors took the stock higher, due to technical analysis reasons.
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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.