By Tom Winnifrith, The Sheriff of AIM | Tuesday 4 July 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
My contention, questioned by certain other well known share bloggers, is that TrakM8 (TRAK) is what Warren Buffett would define as a "bad company." That is not saying that it is a fraud. It is not, although it has told untruth's in RNS's and raised cash to buy some strange old businesses. It is bad because it just does not generate free cashflow. Paul Scott, PR crony capitalist Reg Hoare or the paid corporate shrills can bang on abourt earnings per share till the cows come home but earnings are a matter of opinion, cash is a matter of fact. Trakm8 yesterday published its, piss poor, results for the year ended 31 March 2017.
Profit before tax was down 77% and basic earnings per share were down 60%. Much more worrying was the increase in net debt up £2.8 million after new share issues raised net cash of £2,070,157.
Trakm8 paid £778,932 (primarily in cash) for Roadsense, its latest acquisition. Taking Roadsense’s purchase price into account, the net cash burn was closer to £4 million. Roadsense contributed £580,010 to revenue since its acquisition on 1 August 2016 and made an operating loss of £235,239 in the same period illustrating the scale of the challenge to make this acquisition a positive contributor to profits and cashflow.
The dire decline in free cashflow was explained by Trakm8 as follows:
“Net cash generated from operating activities was £0.7m (2016: £4.5m). This decrease was largely due to the reduction in our earnings before depreciation and amortisation plus the funding of increases in our inventories, reduction in trade and other payables and our investment in engineering resources. In addition, we have experienced a net £1.9m working capital deterioration compared to 2016 due to our evolving business model, reflecting many customers' preference to sign SaaS (software as a service) type contracts which spreads the payments for hardware and software elements over the term of the contract.
Our free cashflow (operating cashflow less capex and capitalised development costs) was a net outflow of £3.0m (2016: inflow £2.0m) after our substantial investment in capex and capitalised development costs of £3.7m. Our free cashflow as a percentage of adjusted operating profit was -228% (2016: +51%). We anticipate improved cash flows in the new financial year as our profitability improves.”
A significant element of Trakm8’s net assets are now represented by intangible assets of £17,107,776 which need to be justified by reference to future positive cash flows so it is disappointing that group is still experiencing such significant cash outflows. The change in customer preferences to pay over the term of the contract will further hinder the delays in Trakm8 becoming cashflow positive..
At 94p - that would be c 140p below the point when a certain person filled his boots, after the shares crashed from well over 300p on my groundbreaking analysis, descroibing his buying opportunity as a "Winni-wobble" the market cap is £33 million. To be fair Paul did admit that his Winniwobble call was a bad one. Too right - don't mess with The Sheriff of AIM on what is now one of his specialist subjects!
No doubt, over at house broker FinnCap, the analyst Lorne Daniel - a good, honest, likeable and clever man - will be being ordered to justify a buy stance with reference to the low PE or EV/EBITDA multiple but what he should look at is the free cashflow multiple. You can always create profits by capitalising anything that moves and if you have repeatedly high capex bills just to keep going that is not what Buffett talks of as a good business.
The fact is that TrakMK8 is still not generating free cashflow and that makes the valuation absurd. Without a bailout placing at just 67p a few months ago this company would be deep in the merde. At this rate of cashburn it will be back on merde street before too long. The stance remains sell.
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