Investors’ Chronicle: Tracsis, Epwin, Saga

BUY: Tracsis (TRCS)

Recent industrial actions will encourage railway companies to invest more in software, writes Arthur Sants.

Tracsis sells transport software. Around half its revenue comes from railway software, which does everything from monitoring the trains to improving the customer experience. The other half of the revenue comes from events, data analytics and consultancy, which helps in logistical organisation for large events.

Year-on-year rail technology revenue increased by 69 per cent to £19.7mn. The acquisition of RailComm in North America boosted reported revenue, however, organic growth was also impressive, rising 25 per cent.

Data, analytics and events has fully recovered from the Covid-19 disruption and revenue rose 11 per cent to £19.5mn. However, adjusted cash profit fell from £2.2mn to £1.9mn but this figure included £400,000 paid to staff in cost-of-living allowances, strip that out a profit rose slightly.

The biggest opportunity comes from the railway business. Rail technology has a cash profit margin of 28 per cent which is much higher than the 10 per cent in data and analytics. The acquisition of RailComm provides opportunity for cross-selling in the US, which recently announced large subsidies for the rail industry. As railway revenue grows, group margins should rise.

Management warned the recent railway strikes in the UK might disrupt the business in the short run. But in the longer term this is an opportunity. When employees refuse to work and ask for more money, it speeds up the automation process.

FactSet broker consensus forecasts earnings per share to rise to 40.7p in 2024 which gives a price/earnings ratio of 22. It is a little expensive but we are bullish on rail prospects.

HOLD: Epwin (EPWN)

An encouraging operational performance has been crowned by a promising strategic acquisition, writes Mark Robinson.

A year ago, we ventured that Epwin had “laid the groundwork for further revenue growth” through a series of bolt-on acquisitions, along with the view that margins might come under pressure due to the “inherent time lag in passing through increased costs to the customer base”.

Ultimately, the building products group was more successful than anticipated on the latter front, which meant that 2022 revenue growth was “predominantly driven by selling price increases to recover the continuing impact of inflation”. Indeed, management took the decision to exit contracts whenever it was unable to cover material price inflation. So, although statutory profits pulled back due to one-off acquisition related costs and a £3mn goodwill impairment charge, underlying operating profits were 16 per cent to the good at £21.5mn, reflecting a 40 basis point increase in the related margin to 6 per cent.

Acquired assets also contributed to top-line growth, and towards the end of the year the group acquired Poly‐Pure Limited, a UK PVC building materials recycler, for £14.9mn, along with a £15mn earn-out provision. Management deemed the acquisition a “strong strategic fit” that enhances the group’s “sustainability credentials”. That’s no bad thing given that a significant proportion of sales is destined for the new-build and social housing sectors, both of which are subject to tightening environmental regulations.

The group recorded a pre‐tax operating cash inflow of £38.6mn (2021: £34.9mn), set against a net acquisition cash consideration of £17.8mn, primarily reflecting the Poly‐Pure deal. The upshot is that covenant net debt increased by 90 per cent to £17.9mn. Although it remains well within the upper range limit at 0.6 times cash profits, the multiple does not take account of £92.6mn in lease liabilities.

A narrowing enterprise/Ebitda ratio could indicate that Epwin is undervalued, at least relative to historical performance. But the hefty material commitments under IFRS 16 keep us on the sidelines.

HOLD: Saga (SAGA)

Different strategies offer shareholders hope of a turnaround, writes Julian Hofmann.

Saga’s reported results were heightened in their complexity by the mingling of changes in asset prices with goodwill writedowns in its insurance business, which the company had already reported in its interim results.

The net outcome was a greatly enhanced loss before tax of £254mn, which probably obscured some of the positive developments for the company as demand for its holidays increases. With Saga also refinancing some of its debt, the outlook looks slightly brighter.

This was most apparent in the cruise and holiday businesses. Overall, the segment narrowed its losses to £9.9mn, compared with £79.3mn this time last year. Saga’s cruise ships are working to a load factor of 72 per cent for 2023-24, with revenue per passenger forecast at £339.

The other bright spot was Saga’s insurance broking business, where earned income of £69mn was 4 per cent higher. This relatively robust performance contrasted with Saga’s consistently underperforming underwriting business, which saw profits decline by 65 per cent to £19mn for the year. The underwriting business is now being put up for sale as Saga looks to rationalise the insurance segment.

Saga is sticking with its debt reduction strategy ahead of the refinancing of a £150mn bond due in May 2024. Part of refinancing that debt was settled in these results, with the company agreeing a new £50mn loan facility with Sir Roger De Haan.

Stripping out the impact of the debt, Numis forecasts an enterprise value to sales ratio of 1.7 for 2024, taking into account that the key summer holiday season is still ahead. Saga has shown resilience, but more tangible improvements are needed to change our view.