Tracsis PLC (LON: TRCS) – Successfully navigated the first phase of the Covid-19 crisis and are well-positioned for the future.

Tracsis PLC is a FTSE AIM 100 Index listed Company, which provide services related to software, hosting, consultancy and bespoke technology solutions to the traffic and transport sector. The business comprises of two main offerings – ‘Traffic and Data Services’ and ‘Rail Technology and Services’. The Traffic and Data Services division deals with data capture, interpretation, and analysis of traffic and pedestrian movement. The Rail Technology and Services division include the application of remote condition monitoring technology, software development, and associated consulting services.

The Company’s products and services are principally used for reducing cost, increasing efficiency, improving asset performance, and enhancing decision-making capabilities.  The Group employs around 450 employees in facilities across Ireland and the UK. The Group has grown through both acquisitions and technology investments since the establishment in 2004.

Growth Prospects and Risk Assessment

Tracsis keeps on launching new platforms and upgrade the old products and services to become one of the market leaders in the software and computer services sector. Through the wide-ranging scope, the Company has accelerated growth organically and through acquisitions. It continues to invest heftily in the technology base and continue to focus on developing next-generation products for the transport industry. Moreover, the Group has secured several contracts to sustain the organic growth in the future. Despite the Covid-19 challenges, Rail Technology & Services businesses have been performing well due to the high levels of recurring Software revenue. Furthermore, it has a substantial pipeline for future opportunities. Also, the Group is relatively immune to the risk arising from the Brexit uncertainties since only around 5% of Group sales comes from European Union customers.

(Source: LSE, chart created by Kalkine Group)

However, there are certain potential risks which can impact the business. Reduced government funding can derail future opportunities. The heavy reliance on large customer poses uncertainties to the obtained revenue. Increasing competition can also put pricing pressure in the future. Moreover, failure to adopt the technological changes can reduce the level of business. In the short-term period, the market environment remains uncertain and volatile because of Covid-19 mayhem. The government restrictions have been impacting the activity level across the United Kingdom. Global political uncertainty regarding trade policy also poses a risk for the Group, including protectionist measures and regulation or legislation in local markets.

Industry Outlook Dynamics

As per the report from MarketsandMarkets Research, the market size for traffic management services is projected to reach USD 57.9 billion by 2024 from USD 30.6 billion in 2019, representing a Compounded Annual Growth Rate (CAGR) of 13.6% between 2019 to 2024. The key drivers for growth include Rapid Urbanisation (population growth, and increasing requirement of mobility as a service), Big Data and Connectivity (increasing usage of connected devices, intelligent transport system, and visualisation), and need for Enhanced Performance (for safety, asset optimisation, delay minimisation and integrated solutions).

(Source: Company Website)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Tracsis Plc. 

Recent Developments

On 28 September 2020: The Company announced that Max Cawthra (Chief Financial Officer) has informed the Board of his intention to step down from his position in early 2021. However, the Company has proposed the appointment of Andrew Kelly (as Chief Financial Officer) and will join the Group on 1 February 2021.

A Glimpse of Business Segments

Financial and Operational Highlights (for the year ended 31 July 2020 (FY20), as on 26 November 2020)

(Source: Company Website)

• The Company has seen strong demand and growth in Rail Technology & Services division and in the data & analytics capabilities.
• Led by the challenges of Covid-19, the Company’s revenues were slightly less than the previous year, but it has shown strong growth in the sales of Operational & Infrastructure software, and good performance in consultancy and professional services.
• On a like for like basis, the adjusted EBITDA was adverse as compared to the previous year, due to the impact of Covid-19 on the Traffic & Data Services Division.
• The Company witnessed a cash balance of £17.9 million (which was reduced from FY19, due to the acquisition of iBlocks Limited) and cash generation continues to be strong.
• In the Rail Technology & Services Division, the EBITDA margin has shown an improvement from the previous year.
• During the year, the Bellvedi business has traded well and secured a significant RSSB grant.
• In FY20, the Ontrac business was also traded well and secured a number of good bespoke software development contracts. Moreover, it remains supported by high levels of recurring revenue.
• In the Remote Condition Monitoring (RCM), the revenues increased to £4.8 million against the previous year (2019: £4.9 million). RCM business has also received a major order in May 2020.
• Further, the integration of iBlocks is progressing well and has shown decent performance since joining the Company.
• In Traffic & Data Services division, the revenues were adverse to the previous year, but the business was trading well (before the Covid-19 pandemic) and had a strong order book.
• Overall EBITDA margin in Traffic & Data Services division was less than the previous year due to the impact of Covid-19.
• The Company has shown Q1 trading in line with the Board's expectations.
• Despite the ongoing challenges of Covid-19, the Company expects modest revenue growth and EBITDA margin improvement in the financial year 2021 as well as expects the cash position to remain equally as strong.
• It will provide a good platform for investment in future growth and opportunities, supported by strong cash generation.

Financial Ratios (FY2020)

Share Price Performance Analysis

On 1 December 2020, at the time of writing (before the market close, at 10:05 AM GMT), Tracsis Plc shares were trading at GBX 619.12, up by 0.67% against the previous day closing price. Stock 52-week High was GBX 840.00 and Low of GBX 420.00, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 20-day (around GBX 548), 50-day (approximately GBX 557) and 100-day (around GBX 580) simple moving average price. Also, the MACD line is placed above the central line, indicating a bullish setup.

In the last month, TRCS share price has delivered around 19.42% return as compared to the approximately 10% return of FTSE AIM 100 index, which shows that the stock has outperformed the index during the last month.

In the last five years, Tracsis’ stock price has delivered a positive return of ~32.97% return as compared to positive ~17.58%  return of FTSE All Share Software & Computer Services and a positive ~54.07% return of FTSE AIM 100 index, which shows that the stock has outperformed the benchmark sector; however, it has underperformed against the AIM index.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook Scenario

Despite the challenges in the economic environment, the trading stood better than the expectations. The strong trading from Rail Technology & Services Division, which was generally unaffected by the pandemic, exceeded the budget expectations. The Q1 FY21 trading was also in line with the Board’s anticipations while two major rail contracts are in latter stages of negotiation. It has also secured all software license renewals. TRCS continued to deliver large multi-year projects and has a strong pipeline of opportunities in future. The Group added new products and services related to smart ticketing under the Rail Technology business, with the acquisitions of iBlocks Ltd. The acquisitions made in the financial year 2019 were successfully integrated, and synergies were achieved. Overall, the Board is confident that the medium to long term growth prospects for all parts of the Group remained unchanged as the Company remained committed to strategic growth and investment plans.

Considering the strong demand and growth across the Rail Technology & Services division, improvement in the Europe and Rest of the World regions, good performance in Consultancy and professional services, a robust balance sheet, decent operating & financial performance, decent level of cash generation capabilities, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Tracsis Plc at the current price of GBX 619.12 (as on 1 December 2020, before the market close at 10:05 AM GMT), with lower-double digit upside potential based on 5.52x EV/NTM Sales (approx.) on FY21E sales (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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