The micro-cap space on the stock market is far from everyone’s cup of tea and is understandably avoided by many, not least due to the often illiquid nature of shares in such companies.
That said, this is an area that has, in specific instances, served me very well over the years and one such case includes the company I am looking at here today, which effectively amounts to a revisit on what was a previous subject in my Cambridge News column.
Touchstar Technologies (TST) formerly known as Belgravium operates across the vast logistics space, where it provides a range of mobile data computing solutions to what are perhaps some surprisingly big blue- chip names.
I say surprising, as TST, with its shares currently sitting at 95p is valued at just £8m, which sees it firmly entrenched in that micro- cap arena.
For those that are not averse to delving into this space though, I believe that TST could prove a rewarding play for me over the next few years, where its prospects on growth and increasing profitability look extremely positive as it continues to gain traction.
In addition to its current positivity on the trading front, the company now sports an increasingly solid and sound balance sheet that sees net cash of £3.5m accounting for more than 40% of the current market value and which in turn, effectively sees the business itself valued at just £4.5m.
The company is very much a familiar subject to me, where I bought in, back in 2016 in the mid 60p range, prior to its going on to enjoy a stellar run, which subsequently resulted in my selling out at £1.10p and circa 90p.
The reason for selling back then, was purely my take at the time that it was up with events and the near-term prospects had become somewhat blurred.
It proved a good call, as the company subsequently warned on profits, largely being hit by some legacy issues on the trading front. It also went on to sell its on-board retail arm that served airlines in 2019 which proved to have been a sound move given the onset of the pandemic in 2020.
Back to the present though and I elected to buy back into this story with a couple of purchases some months back, where although I am currently showing a small profit, I believe there is more substantial and meaningful upside to come.
Alongside what has been positive trading momentum which should in time drive the share price further northwards, there is also the prospect of dividends now very much on the cards in the near term, or even a one-off special along with possible share buy-backs, as the company is in all together better and more stable place than I can recall since my following its journey.
Looking at the company, which has its headquarters in Manchester, TST produces and provides both hardware and software- based solutions that covers a multitude of interactions across the vast logistics space with exposure to different sectors of industry.
In very basic terms, this is the kind of stuff you see when a delivery is recorded at a warehouse or stock is checked, along with monitoring materials and liquids in transit.
Across the logistics space though, it provides much more, with numerous complementary offerings that deliver to its customers the likes of the optimisation of works schedules, along with supply chain data management and recognition functionality and tracking.
There is also embedded voice and bar code recognition provision in its products enabled by immediate and constant data capture, providing real time visibility that is driven by GPS satellite tracking.
Despite being something of a minnow in the space, TST has nevertheless built up an impressive and growing list of customers that include the likes of Tata Steel, Wincanton Logistics, Calor and Certas to name but a few, along with big players in the petroleum space.
As part of this picture, it now has a base of over 500k installations where it enjoys a high level of roll-out and repeat business.
Although the business has been operating across the sector for many years there are, more recently a couple of distinct drivers for the current positive picture on the business that has paved the way for a sustained growth and profitable path
One of those, is a previous in depth restructuring and the subsequent transformation of the company which has been driven by Executive Chairman Ian Martin who has a highly impressive track record, where prior to joining the TST board had already bought into the story through acquiring shares.
When I first spoke with Martin back in 2017, he pointed to TST as having really failed to move on and drive new products, but yet had the technology and huge potential to succeed.
There was certainly ambition and a belief on display back then and given his past track record, few would doubt his words.
Martin was formerly at Avesco, where as CEO there he oversaw a complete overhaul of the business which shifted from a struggling £50m revenue operation to one achieving £150m, with compound profit growth of 20% per-annum.
Whilst that didn’t happen overnight, equally the transformation at TST has taken time, where only now, some seven years after his arrival at the company have the fruits of change really ripened.
Having bought a substantial stake in TST prior to joining the board, it does suggests that he had identified a business with scope for organic growth where he clearly had ideas on how to maximise the opportunity for the business.
In terms of the present, having already issued positive updates to the market, TST recently unveiled its full year 2022 results that saw revenue come in at £6.7m with EBITDA of £1.3m and a pre-tax profit of £0.4m.
EPS delivered of 6.6p imply a PE of 14 at the current price of 95p, but that reduces to 11 for the current year, falling to below 10 for next year.
Within that valuation though, it is worth factoring in the cash, or as some elect to do, strip it out.
Which, given that it makes up approaching 50% of the current market cap, suggests the shares are very much on the value or cheap side as an investment prospect.
Taking a look at the Stockopedia site which provides some very useful information, the price to free cash flow figure of 6.5 is a positive, whilst the price to sales figure of 1.2 represents a more progressive and improving picture as does the return on capital which is heading in the right direction.
Although Martin, who has been driving the business plans to step back in due course, it shouldn’t cause concern, as not only will he retain a significant 9.5% shareholding, he will also no doubt ensure that the management team remains firmly concentrated on the current path, along with being able to accelerate further and embrace new technology to assist.
Importantly, as part of its strategy, TST now enjoys an increasing and highly welcome aspect of ARR which today accounts for some 40% of the total revenue and should increase further going forward.
Alongside that, significant new customer wins have been achieved and since the start of the year trading is reported to have been strong.
With what is a high barrier to entry, the company is presently seeing the market as remaining buoyant, where it is enjoying ongoing new customer enquiries that has also resulted in annual and monthly subscription to both hardware support and software licensing remaining both strong and growing.
As part of its ongoing and accelerating growth strategy the company is also ready to capture export opportunities that are now gaining traction, whilst it is also at the point where it is seriously considering specific acquisitions that will enhance its existing offerings.
Anything bought though, will most likely be a specific complement to its technology as opposed to another competitor as Ian Martin is very much a believer in organic growth as opposed to bolt-on-buys, as he informed me in the past.
As a result of the restructuring process, gross margins within the business have also been improving, moving from 59.5% in 2021 to 61.7% last year and are seen by the board as progressing positively in the coming years, with cash generation also continuing to remain solid and increasingly impressive.
Being a micro-cap play the spread as with other such stocks can be quite large as evidenced by the current bid to offer swing at TST, which stands at 90p-£1.05p.
Nobody likes to make a purchase of shares only to see that they are down in excess of 10% at the outset and as a result many will be turned off, no matter how good the story looks.
However, there are a few things to counter such a concern, in that firstly it is often possible to get within the spread at an acceptable level, whilst secondly, such stocks as TST do tend to move considerably in price on positive news.
Of course, it works both ways on the sentiment front, but right now and for the foreseeable future TST is performing very well with a positive outlook in a market that is forecast to continue growing in the coming years.
One area of its business that appears to be performing particularly well is across the petroleum space, which sees TST providing fuel haulage and distribution operators with systems that cover a multitude of logistical support and where it now has a 70% share of the UK fuel delivery market.
This takes in amongst others proof of delivery with signature capture along with driver and vehicle tracking and location.
There are, as can be seen by its market share numerous operators in this field and customers already using the TST technology supply the likes of BP Oil UK, Esso, Tesco and Sainsbury.
Interestingly in this space, TST also appears to have picked up and continues to win business on the back of existing legacy products that have been used over the years but which are now lacking in an update facility, thus opening the door for the company.
Most recently, TST has revealed more positive news in that DCC Energi a massive player in the oil distribution space, is making a significant investment in TST’s fuel delivery technology for its operations.
This sees TST now active in Denmark representing a solid endorsement from a major industry player and could no doubt open the door further on the overseas expansion front.
The company has already embarked on that journey into Cyprus and Turkey, with Greece seemingly close to hand, whilst the US is now also figuring, as early conversations have commenced with potential partners there.
All in all, the company looks to be operating well, is generating cash and has good visibility, the board being comfortable with current forecasts for the next two years.
More news on trading may well emerge when the forthcoming AGM takes place and it is feasible that an upgrade could emerge on numbers, in light of the previous upbeat tone and more recent news on further adoption.
I am hoping to set another call up with Ian Martin in due course in order to expand and build a bigger picture on the business.