Small Cap Value Report (Weds 19 Aug 2020) - TRCS, LUCE, SOS

Good morning, it’s Paul here with the SCVR for Weds.

Today’s report is now finished.

I rarely watch films (short attention span amp; easily bored), but I watched the most gripping film this weekend. I’m sure many of you have already seen it, but if not, I cannot recommend this enough. It’s called All The Money in the World – based on the true story of John Paul Getty, and his grandson being kidnapped. It raises all sorts of moral issues: should ransoms be paid?, the problems caused by the pursuit of extreme wealth, family breakdown, what drives some people to put career before people, etc.. The old cars, and wonderful sets, were an absolute treat to behold also. The whole thing was utterly brilliant.

It looks like the rain has set in for the day. Not much company news for me to report either. So I should be mainly finished well before the official 1pm finish time today.

I’d just like to express my appreciation for MrContrarian’s long-standing morning snapshots of the daily newsflow, and more recently Dan HollandSmith’s different format, but excellent snapshot reports too. I think we’re really lucky to have both of these computer wizards, with their own software, posting these lightning quick mini reports each weekday (in the comments below). They’re certainly very helpful to me, steering me towards the most interesting small cap stories to write about in more depth in my reports. So a hearty thank you to both of them, and long may it continue!

Today I’ll be looking at;

Tracsis (LON:TRCS) – trading update

Luceco (LON:LUCE) – trading update

Sureserve (LON:SUR) – formerly called Lakehouse – trading update – sorry I ran out of time amp; didn’t look at this.

Sosandar (LON:SOS) – I’ve got a call with management late morning, so if anything interesting comes from that, I’ll report back. My feeling is that the business is definitely going to succeed, as in reach scale amp; become profitable. The only questions are: how long will it take, and how much will it cost, in terms of more fundraisings amp; dilution? Although the swift action taken to slash costs (esp marketing), which resulted in it getting close to breakeven in April-June is very interesting amp; demonstrates the huge advantage online retailers have in a downturn, with more flexible overheads. Maybe a slimmed-down cost base, and modest but carefully targeted marketing spend is the way forwards? I’ll be asking that question (and others) today.

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Share price: 640p (up 11%, at 09:27)
No. shares: 29.1m
Market cap: £186.2m

Trading Update

Tracsis is a leading provider of software, hardware and services for the rail, traffic data and wider transport industries, and is pleased to provide the following trading update for the year ended 31 July 2020.

Previous update – before getting on to today’s update, let’s have a look at what Tracsis said last time, in its trading update of 9 July 2020. We didn’t cover it here at the time, so here is a quick summary;

• Covid has had a negative impact, but less than originally expected
• FY 07/2020 revenues expected to be reduced by £10m
• Guidance: c.£46m revenues (hence a £10m covid hit is a big impact, in arriving at this number)
• Profit impact mitigated by cost cutting
• Rail businesses “continued to trade very well”, due to high recurring revenues
• Continuing large, multi-year new implementations amp; good pipeline
• Cash strong, c.£16m, after paying tax amp; deferred consideration on time

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Today’s update – for FY 07/2020 – what has changed since the last update?

Revenues – now saying £48m, an increase of over 4% compared with the above. That’s impressive, to have clinched £2m extra sales in the last 3 weeks of the year

Covid impact – now described as “much less than originally feared”, as opposed to trading being “better than originally expected” in the last update, which subjectively strikes me as a positive change in tone. The tone also seems to have improved in the comments on the various divisions, e.g.

… assisted by a very strong performance from our Rail Technology amp; Services Division.

Profit guidance – we’re given some numbers this time, which is good;

EBITDA margin (pre IFRS 16) 20%, only slightly down on 21% LY – very impressive, given the large (£10m) drop in revenues compared with original forecasts

A 20% EBITDA margin on £48m revenues gives us £9.6m, down on £10.5m EBITDA LY (last year). That looks a creditable performance to me, in the circumstances

Cash – was £18m at end July, up £2m since 9 July – very nice – Tracsis doesn’t seem to be stretching creditors either, hence this is a true figure. Gives scope for more acquisitions. Tracsis is unusual (i.e. good!), in that it funds acquisitions from cashflows, not through debt

More colour given on individual group companies’ performance, which all sounds really good;

In addition, our Remote Condition Monitoring business has traded very strongly, as have all of our Software businesses which continue to deliver a number of major multi-year contracts. Alongside this, the Group has started delivery of the recently announced major software contract wins which include a large multi-year TRACS Enterprise contract and a large RSSB grant secured by Bellvedi to develop innovative dynamic train planning software over the next two years. iBlocks, which was acquired in March 2020, has traded well since joining the Group, and integration is ongoing and progressing well. The business continues to pursue a number of exciting opportunities in the smart ticketing space, which could be a major growth opportunity.

I can see why the share price is up 11% today, this all sounds great.

More information is given, but I’ve got to stop somewhere.

My opinion – this is a really good update, I’m very impressed. Tracsis has demonstrated that it’s resilient to covid disruption – useful to know, in case there’s a second wave in the autumn/winter. Profitability has been only modestly impacted, due to much revenues being recurring, and in the problem division (traffic monitoring) it can flex costs down easily, e.g. casual labour. Therefore, this is a really good business model.

I also like the upbeat outlook commentary, the decent cash pile, and the disciplined approach to acquisitions, which has worked very well.

There’s a lot to like here, and I think Tracsis is likely to continue to be a fine long-term investment.

EDIT: I’ve just spotted an update note from Finncap, thanks to them for making it available to PIs through Research Tree. Adj EPS is forecast to be 24.5p for FY 07/2020, with no forecasts for now. Forecasts should be reintroduced in Nov 2020. As a general point, Thomson Reuters seem to leave old forecasts visible, until replaced with new ones, so it’s always best to check whether the numbers are still relevant, re covid impact.

The PER is 26.1 based on FY 07/2020 (a bad year, due to covid impact). I don’t think this is a fair valuation basis though, because it’s perfectly reasonable to assume that earnings should rebound in FY 07/2021, and it sounds like there are good growth initiatives in the pipeline too. Hence personally I would estimate earnings might recover to say 30-35p in the foreseeable future, and put that on a PER of 20-25, which is reasonable for the quality of the company, and its cash pile. In this way I get to a valuation range of 600-875p – I prefer working on a reasonable range, rather than specific figures.

Hence at 640p, this share looks reasonably priced to me, quite good value actually. Whether there’s enough upside for me to buy right now, probably not, but it’s the sort of thing I’ll keep on my watchlist, to buy if there’s a general market sell-off at any point.

Looking at the 5-year chart below, actually it hasn’t done anywhere near as well as I imagined, with only tiny dividends on top. That’s quite surprising.

(End of edit)

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Share price: 180p (up c.12%, at 11:44)
No. shares: 160.8m
Market cap: £289.4m

Trading Update

Luceco plc (“the Group” or “Luceco”), the manufacturer and distributor of high quality and innovative wiring accessories, LED lighting and portable power products, is pleased to provide the following update on trading ahead of the scheduled announcement of our interim results on 8 September 2020.

The current financial year is FY 12/2020.

How about this (below) for clarity, I wish all company updates were this clear. I’d be out of a job because investors wouldn’t need someone to unpick all the detail, work out the figures, and spot where the bodies are buried.

Our first half results remain in line with guidance given in our pre-close update on 13 July 2020. Since then, our performance has continued to improve and our expectations for full year 2020 Adjusted Operating Profit have increased from at least £18m to at least £23m….

Significant additional progress is possible if the second half is unaffected by the macroeconomic uncertainty referred to above….

Furthermore, ongoing work across the Group’s global operations to improve tax efficiency should mean that Adjusted Earnings Per Share will be at least 11.0p.

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Other points (my summary) –

• Robust demand from – e.g. online/multi-channel/DIY, now professional/wholesale also recovering amp; restocking
• Steady improvement in Q2 continued into Q3 – good visibility (expecting low single digit LFL revenue growth)
• Improved margins due to product mix – more own brand – guidance of 40% gross margin this year (36.2% LY). H1 2020 was 38.4%, which suggests the H2 2020 run rate must be higher, around 42%?
• Q4 2020 “inherently uncertain” - stimulus policies? Risk of covid 2nd wave, etc. Fair enough, nobody knows what’s going to happen for sure

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Outlook – this is remarkable stuff, considering what a freak year we’re having due to covid;

… The outlook for later in the year remains uncertain for all, but what we know confirms that 2020 should be a year of strong profit growth for the Group despite very challenging conditions – a product of a consistent strategy and the unwavering commitment of the entire Luceco team.”

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My opinion - this is tremendously impressive, and I can see why the share price has recovered so strongly. This update is a model of clarity, and gives us detailed guidance, which couldn’t be better. Take note everyone else!

EPS of “at least” 11.0p thrashes the existing consensus forecast of 8.46p, and it sounds like there could be further upside on 11.0p. If we assume say 12p for this year, then at 180p share price, the PER is only 15 – quite low for a company powering ahead with superb profit growth during a nightmare year. If this strong performance continues, then I foresee further upside on this share.

I’d like to get to grips with more precisely how Luceco is delivering such a strong performance, and whether it’s sustainable longer term? In any case, this is a terrific update, and shareholders must be delighted – well done to anyone who bought at the March lows, as you’ve almost got a 4-bagger already!

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I had a really interesting call with Sosandar (LON:SOS) management this afternoon, but am too tired to do any more writing for today, so will report back tomorrow. See you in the morning!

Regards, Paul.

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