Happy 2022 – throughout the year we are asked for our best ideas for share price appreciation, but January differs in that we write them down. Last year’s choices were Proactis (+64%), Tremor (+41%) and D4t4 (+22%), not a bad trio. Within our coverage list as at January 2021, the other notable winners were Universe (+207%); Kape (+127%); Minds + Machines (70%); and Access Intelligence (+69%): notably Kape and Access Intelligence upside has been delivered through significant acquisitions funded by placings; and Universe and Minds + Machines respectively bid for and acquired.
This year’s selection (Tracsis, Quartix and Tremor) offers equivalently strong opportunity to any in that pack. We won’t go on about the multiple choices we had, for fear of becoming a list, and we note that upside relates to a 12 month target price, subject to review with delivery of proof points throughout the year. (Full report available here on the finnCap research portal).
First up is Tracsis (TRCS), with a strong catalyst for demand for TRCS software in the rail industry, as the regulator sets out aims and expectations for operating efficiency and passenger convenience.
There are two core drivers for top line growth: strong underlying post COVID recovery in events & traffic data, back to near pre COVID levels, and in the rail focused RT&S division growth across the board, given the efficiency gains which the software delivers (and even delivering growth during COVID) – but also with the regulatory impetus of the May 2021 Williams Shapps Report for Rail looming benignly over the industry. On top of that, the benefits of integration will be delivered by new management’s attitude to historic and prospective acquisitions; while international growth offers yet further upside.
In the growing Rail Technology division, in the near term we expect news of contract wins and completed deployments, particularly for TRACS Enterprise, RailHub and smart ticketing in the UK and RCM internationally, to stoke further interest. In the medium term, UK regulatory change (the Williams Shapps report and the creating of GBR, Great British Railways) will drive efficiency and change in the industry. In the longer term, evidence of success in international opportunities, particularly the US, creates global expansion excitement.
Pre-COVID FY19 revenue was £49.2m, prior to the FY benefit of Compass Informatics, CTM and Bellvedi; and acquisitions of iBlocks, Flash Forward & Icon since, and adding on organic growth in RT&S. £62.5m revenue to July 22 should be highly achievable. No R&D is capitalised; and the group retains £25.4m cash, including £16m free cash after payment of deferred consideration payments. At a current share price equating to 16.7x FY23 EV/EBITDA, and 3.8x EV/sales (in line with the finnCap Tech 40 Enterprise software index) we believe the stock will outperform and justify a premium rating. We acknowledge that where government and regulators are involved there is also chance of obfuscation, delay, and trade union action - however change is already in progress with COVID hastening the demise of the former franchise system in favour of Passenger Service Contracts.
Secondly, Quartix (QTX) is a leading international supplier of vehicle telematics services to mainly SME customers (>20k, customers with an average fleet size of 9 vehicles) in the UK, Europe, and the US, sold direct through telephone and field sales agents. The stock has been consistently highly rated by investors, for the security of its recurring revenue, its cash generation and management quality. The high rating has recently slipped on overblown fears of an Omicron lockdown and a perceived lack of growth; revenues have appeared flat as the Insurance telematics business has wound down, offsetting steady strong growth in Fleet telematics.
The Insurance offset will come to an end in 2022 as installations cease and it becomes immaterial. Furthermore, 2021 saw significantly increased investment in sales and marketing to accelerate that Fleet growth in the years ahead, to take advantage of weakness in rivals after the pandemic and expand the international opportunity. The margins are temporarily reduced, but the outcome will be much stronger growth.
Telematics is essential to any modern fleet operation and the pandemic has driven commerce online, with groceries, goods and services now delivered by fleets of small commercial vehicles which all need tracking. The QTX business has been well protected through the pandemic, while the growth in France and the newer European operations is looking very impressive. There is huge opportunity to be tapped in the US. Finally, QTX has a new yet still very experienced management team, keen to drive it forward.
Current margins are artificially low as QTX invests in Fleet growth, which distorts valuation metrics. QTX has previously seen >30% margins and on c.£30m revenues, could deliver £10m EBITDA. High quality recurring earnings demand c.25x multiples, suggesting an EV in the region of £250m and our 525p target price.
Thirdly, Tremor (TRMR) appears once again in our top picks. Tremor is unreasonably cheap: 8 consecutive upgrades since June 2020 have not yet grabbed investors’ imagination despite strong, structural organic growth, and we look to the valuation gap with US peers to narrow in FY22.
Tremor is capitalising on the structural shift in ad spend to connected TV and digital video viewing that was accelerated by COVID-19. US linear TV advertising has historically seen ad spend of c$65-70bn pa, but an IAB survey in Q4 21 highlighted that advertisers are expecting to reduce their US linear TV spend by 17% in 2022, and eMarketer is expecting US CTV ad spending to increase from $13bn in 2021 to $28bn in 2025 at a CAGR of 20%.
We expect Tremor’s differentiated, end-to-end platform will continue to capitalise on the shift in 2022, as for the first time it will have global, exclusive ACR data from its partnership with VIDAA, and it has enhanced its best-in-class solutions for broadcasters and CTV partners through the October 2021 acquisition of Spearad. Through 2021, it outperformed the organic growth of many of its US peers, including +54% in Q3 21 vs +22-54% for its peers, and its accelerating momentum has driven eight consecutive upgrades to our forecasts since June 2020. Following a shift in investor sentiment in November 2021, we expect continued execution of its investment case through 2022 will dispel bearish commentators, and its share price is excellently positioned to benefit from upside to our conservative forecasts - which are still in line with the growth of its US peers - and a re-rating from 4x 12-month forward EV/EBITDA to peers at 14-75x.