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This intelligent transport infrastructure technology supplier is a unique, high-quality opportunity with a proven and impressive track record. While most of Tracsis’ (TRCS:AIM) revenue is currently being earned in the UK, there are increasingly vast opportunities abroad that could ramp up the pace of growth and spark a steady stream of forecast upgrades through 2015.
The Leeds-based company supplies software that allows transport operators to plan and operate more efficiently. Originally a spin-out of intellectual property commercialisation specialist IP Group (IPO), it joined AIM in 2007 and has grown rapidly, bolting on value-adding acquisitions to bolster organic opportunities.
Niche focus
By concentrating on the rail and bus companies it is able to develop unique, industry specific solutions, such as workforce scheduling, resource optimisation, data capture, and remote condition monitoring (RCM) reporting technologies that many of the major rail and bus operators need and want. Clients span Virgin, FirstGroup (FGP), Go-Ahead (GOG), Arriva and National Express (NEX), as well as Network Rail itself.
Much of its work is aimed at workforce and asset scheduling, where its software is used to plan how to best use a highly mobile workforce and even track rolling stock. A big opportunity going forward is the use of new technology to automate safety and reliability checks. Currently, much of the process is done manually, which is clearly labour intensive given the vast rail network, but this is starting to switch over to intelligent infrastructure systems, where sensors and black boxes use wireless connectivity to assess thousands of bits of kit - points, tracks, cabling, level-crossing etc - and seamlessly send the information back to a central control room. Stresses can then be spotted early and maintenance people directed to exactly the right problem in a fraction of the time, saving money, cutting workloads and boosting safety standards. Network Rail’s latest upgrade project, Control Period 5, has a £95 million budget exclusively for intelligent infrastructure.
But overseas expansion brings vastly bigger growth hopes, particularly in the US where Tracsis is already working on site trials with a local technology partner. US rail infrastructure runs at around 140,000 track miles, about seven-times the length of the network in the UK. The mere scale of the track network makes RCM technology an attractive solution. Schemes for heavy freight train networks are also running in Scandinavia and Australia.
Profitable every year since joining the market, analysis by investment bank Investec calculates the compound annual growth rate (CAGR) of revenue during the past five years at 70%, and 67% at the earnings before interest, tax, depreciation and amortisation (EBITDA) level. Earnings per share is 52% CAGR, while encouragingly, free cash flow (FCF) has increased 125% over the same period. Even stripping out acquisitions, Tracsis’ progress is impressive. Investec calculates underlying organic revenue CAGR was around 18% in the three years from 2011 and 2014.
Growth: MEDIUM
A niche technology supplier to potentially vast markets in the UK and abroad.
Risk: LOW
Acquisition risk remains, although the company has shown many times in the past its skill at quick and painless integration.
Quality: HIGH
Operational excellence and tight cost control are demonstrated by zero net debt, strong cash generation and a reliable growth model.
Deal flow
Having spend £10.4 million on six acquisitions in as many years Tracsis plans to complete further deals in niche segments of the transportation market. Chief executive John McArthur believes there are loads of potential targets and with a debt free balance sheet and £8.9 million of net cash (nearly 10% of the market value) Tracsis, on an enterprise value (EV) of £94.9 million, has plenty of financial firepower.
Investec itself admits that its own EBITDA expectations for £6 million this year to July 2015, and £6.5 million in 2016, ‘look conservative.’ This suggests that the implied EV/EBITDA multiple of 14.6 for 2016 appears light. On a reasonable 16-times EV/EBITDA this time next year, could imply the shares being valued around 35% higher as the market looks towards July 2017, perhaps more with acquisitions.
Tracsis (TRCS:AIM) 395p
Stop loss: 316p
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Market value: £103.8 million
Prospective PE Jul 2015: 23.9
Prospective PE Jul 2016: 22.6
Prospective dividend yield: 0.9%
Bid/offer spread: 2.5%
Previous Shares view: Buy 311.5p, 1 May 2014
Analyst price target: 456p*
*Investec, 24 Nov 2014