When it comes to buying into quality stocks, it is often the case that you will have to pay a premium in order to take your position.
For some, that won’t be acceptable, although often biting the bullet can go on to deliver excellent returns over the medium to longer term.
There are a number of companies on the market that fit such a bill, not least my old favourite FDEV along with the also Cambridge based Quartix and more recently for me G4M.
But, another company that I covered a few years back and didn’t buy but has performed well also continues to fit the bill is Tracsis (TRCS). At the current price it now looks highly attractive on a forward earnings basis that very looks good value.
Tracsis, based in Leeds is a provider of software and hardware products and services focused in and around the transport sector where it serves the likes of traffic and rail management amongst providing other tailored solutions.
Having been fortunate enough to catch up with CEO Chris Barnes for a broader outline to the business, it is clear that there are sound reasons for the popularity for this company and an often premium rating achieved by its shares.
The fundamental attractions around Tracsis are very much apparent with an impressive return on capital employed (ROCE) a very nice and welcome element of recurring revenues along with strong cash generation and importantly, a very comfortable net cash position.
All attributes that suggest investing here is arguably a more reassuring offering than many other would-be prospects and there is even a small progressive dividend in place to add to the attraction.
Not surprisingly though, the pandemic’s arrival last year in keeping with many impacted the business and at its low point the shares slumped to £4.20p against a high of £8.40p.
Although they have since recovered to a current £6.10p they are I believe worth taking a closer look at, not least, as early worries on the pandemic’s impact have not been as bad as envisaged, whilst the prospects ahead look to be back on track and promise for normal service to be resumed.
Barnes certainly sounds cautiously optimistic on the future and sees plenty of opportunities for the company on both organic growth and acquisitions. “The market we operate in is very fragmented, so there have been plenty of opportunities to acquire and add value over the years and that is something we are absolutely still looking to do” he says.
Additionally, organic growth is a key element of this story and the CEO tells me that as part of their ongoing strategy they are looking to drive that above a 10% figure.
If successful on that front, aligned with further timely and earning enhancing deals that are brought under the umbrella, then the company’s shares should once more attract attention and an increased rating.
The final 2020 results released in November of last year were in line with an earlier update in August where £48m in revenue was delivered, providing EBITDA of £10.5m, adjusted pre-tax profit of £8.3m and EPS of 23.7p.
Net cash was impressive too coming out at £17.9m leaving the business ideally placed to get back on track as the wider economy opens up again.
Commenting on the numbers Barnes said given the arrival of the pandemic that overall they had been pleased with the outcome and that different parts of the business had performed in different ways. “Events had obviously been hit by cancellations, along with traffic surveys and those were obviously out of our control as a result of Covid. However, as things begin to ease and return to normal then we should also see a resuming of that business”.
It was far from all bad news though as rail technology services performed very well Barnes added and delivered strong growth which was underpinned by a multi-million- pound contract. Interestingly, the CEO says that their services relating to the area of rail ticketing is not impacted by low passenger numbers and it continues to be an area that excites them going forward.
What seems apparent from the recent results is that the business spans a whole range of areas across traffic management/ rail and infrastructure with differing offerings and is therefore somewhat insulated in that it is not singularly exposed across the board to a major hit as with Covid.
The products and services are also - given the nature of their markets - likely to be less impacted by economic weakness. Particularly with infrastructure around traffic, traffic management and rail, where there are ongoing requirements
and are likely to prove more resilient.
In developing its products Tracsis delivers expert consultancy, the capture of data, analytics and transport management services all of which are likely to enjoy ongoing demand providing for further growth.
In relation to rail which has performed so well, Barnes explains that Tracsis provides for numerous services to ensure the smooth running of a vast network and it appears to be in a very sweet spot as there also appears to be a high barrier to entry.
“Our software provides for multiple functions which are used by train operators and that will take in areas such the crew, timetabling and monitoring rail stock, it also covers across the field such as point failures, so encompasses a broad range”. With the rail services not having been impacted by Covid and two further significant contracts in the negotiation stages, this aspect of the business looks extremely solid.
Over the years Tracsis has really expanded across the board with an ongoing acquisition programme that within its business model sees much of the strong cash generation used to deliver these.
Overall these have proven highly successful, Barnes adding that they also often provide for strong synergies as they come into the group. The most recent purchase came in the form of iBlocks which was acquired last March and is a provider of smart ticketing, auto delay-repay and mission critical back office systems across the whole of the rail network.
With the digital age well upon us and disrupting long standing practices, the likes of paper form tickets have been in decline and no doubt as a result of Covid this is likely to seriously accelerate providing for further scope and growth for this new aspect of the group. Historically Barnes says that they have paid on average a multiple of 5 to 6x when acquiring although they are prepared to go higher than that for a business that they know they can incorporate well and which can be earnings enhancing.
Covid aside, the business has a very impressive growth track record and looks to have plenty more to aim for which isn’t resigned to the UK as further afield in Europe and the vast US market there is potential for additional growth. For now broker FinnCap is looking for full year 2021 revenue of £50m and adj pre-tax profits of £9.1m giving EPS of 26.1p. This is expected to move to £60.5m of revenue next year with pre-tax profits jumping to £12.2m with EPS at 34.8p. That sees the stock trading on a PER of 23 falling to 17 next year which looks attractive for a business that already sees recurring revenue in excess of 40%, is highly cash generative and is very well placed to take advantage of a return to a semblance of normality across the wider economy.