Traffic and transport software and analytics business Tracsis (TRCS:AIM) spooked the market on Wednesday. The first half to 31 January 2017 is apparently light, based on full year expectations, leaving a lot to do in the six months to 31 July.
‘Due to the timing of software sales that are anticipated and the high seasonality inherent in some parts of the group, the second half of the financial year is expected to be significantly stronger than the first half,’ reads the company statement today.
Investors appear to be reading this as a high level threat of a profit warning in the months ahead, it’s the type of statement that often goes that way with many companies. The share price has slumped 13.5% in early trading, to 402.5p.
But Tracsis is not ‘many companies’, it has a superb record of business execution excellence, which is why it is one of Shares Best Ideas for 2017. The very same second half weighting happened last year yet the company was bang on with forecast, with revenues and adjusted EBITDA up 29% and 17% (to £32.6m and £7.6m) respectively.
‘The year is clearly very second-half biased, but management’s record of delivery is strong (including last year, also H2-biased),’ says Roger Phillips today, analyst at investment bank Investec.
Why so seasonal
The seasonality bit relates to the company’s SEP arm, bought in September 2015. It provides event traffic management solutions for major sports events, music festivals, flower and air shows and more. In other words, planning onsite infrastructure kit, organising parking solutions for hundreds of vehicles, and controlling the admission and access for the thousands people that turn up.
Think the Silverstone F1 Grand Prix or Isle of Wight festival, for example, events that are condensed within Britain’s few short summer months. The main thing to remember is that this is not like retail, notorious for weather related warnings. While shoppers might stay away from the high street when it pours the same cannot be said of a big music gig, where fans buy tickets months in advance in full knowledge that the weather might be bad.
The annual mud-fest at Glastonbury is a good example.
Rail delays, who would have guessed?
The other main issue is in rail, where Tracsis does a lot of work for Network Rail. Some franchise bids have been pushed back by the Department of Transport, now due in March rather than the original January timetable.
Network Rail is very secretive about contracts handed out, Tracsis won’t officially know what it has won until it knows. But the company has been working in partnership with the UK rail infrastructure operator for years. It’s always been this way, and Tracsis has always won its share of software and remote condition monitoring (RCM) orders.
What’s the forecast damage?
Investec’s Phillips calculates earnings before interest, tax, depreciation and amortisation (EBITDA) for the six months to January to be light by about £600,000. ‘We expect half year 2017 EBITDA to be circa £3.5m, which is 10% up on the first half 2016,’ he says. He also adds that ‘cash conversion is implicitly strong once again given a £12.5m closing balance.’
Ultimately, the analyst is leaving full year expectations unchanged, a show of belief in management’s savvy and, presumably, confidence going forward. That implies £9m EBITDA on £34.7m revenue.
A bit of pricing pressure in parts of Tracsis’ data analytics business has emerged, although this may well be offset with a bit of judicious operating cost tightening. Otherwise, Tracsis prospects remain bright. There’s a bulging data work pipeline and plenty of acquisition opportunities crossing management’s desk to suggest further value-enhancing M&A.
Investec’s Phillips doesn’t even include further RCM contracts wins in the vast US market, an area we think is a major opportunity for Tracsis over the coming year or more. Given all of this versus today’s share price slide, this could well be one of those seldom seen opportunities to get shares in a high-quality business on the relative cheap.
