Trakm8 – Buy at 107.5p

Enjoy this free share recommendation on Trakm8, extracted from the latest edition of the premium Trendwatch newsletter…

THERE MAY BE more to our next company than immediately meets the eye.

The company is Trakm8 (TrackMate, geddit?), a telematics company. ‘Telematics’ is a term conflating two other technologies: ‘telecommunications’ – we probably all know what that means – and ‘infomatics’, meaning information collection and processing.

In practical terms, as it relates to Trakm8, let the company describe what it does in its own words:

“Trakm8 is a UK based technology leader in fleet management and insurance telematics, optimisation and dashboard camera systems. Through IP [intellectual property] owned technology, the Group analyses data collected by its installed base of telematics units to fine tune the algorithms that are used to produce its telematics based solutions; these score driver behaviour, monitor vehicle health and continuously improve the security and operational efficiency of both private drivers and company fleets”.

If you know the company at all, you’ll probably know it as the designer and manufacturers of ‘black boxes’ that its insurance sector customers can arrange to be installed in cars to evaluate the probability of individual policy holders – especially new drivers – being involved in a claim. The electronics measures and records such factors as speed, acceleration, braking, routes and journey times; and thus builds up a picture of the driver’s high-risk behaviours. In the event of an accident, the insurance company will know about it immediately. If the driver cannot be contacted, the device can even call out the emergency services. Independent forecasts predict explosive growth in this market. The consultancy Ptomelus estimates that globally, by 2030, almost 50% of vehicles will have telematics-based insurance policies, a huge annual growth rate.

A study by insurance firm Marmalade (also a Trakm8 customer) shows that there are real benefits from telematics-based insurance. Around 1 in 5 new drivers have an accident within 6 months of passing their driving test. With Marmalade’s telematics insurance policies, this falls to 1 in 16, making young drivers three times safer, and no doubt saving many lives and serious injuries.

But more lucrative than this, Trakm8 also provides a similar, but more comprehensive service for commercial companies. It supplies a range of vehicle cameras with telematics built in. Trakm8 can then provide services such as vehicle tracking, route optimisation, scheduling, vehicle health monitoring, fuel efficiency, emission monitoring, mobile phone blocking and so on.

Not long ago, different companies competed to provide these services. Trakm8 provides all of them and more in one package, which makes life a lot easier for fleet managers. This is well illustrated by the stream of orders that it’s winning from blue chip customers, including the AA, Saint Gobain, EON, Iceland, Shell, Scottish Power, Direct Line Group, Euro Car Parts, Young Marmalade, Calor Gas. Intelematics Europe (a roadside assistance technology supplier) and construction company Mecalac.

The company had an annus horribilis  in 2016 (see table below), which helps explain why the share price is depressed. Everything seemed to go wrong:

• Overhead costs shot up by 42% as the company recruited 39% more engineers and 18% more sales and marketing people as it geared up to deal with a strong pipeline of projects.
• Those projects were delayed by 6 months, which meant that the company burned through its cash and had to raise more money… twice.
• The drop in sterling after the Brexit vote cost it another £0.6m, as it sources all its electronic products from Asia, denominated in US dollars.
• The company moved to a Saas (software-as-a-service) model, in which its customers pay for Trakm8’s services monthly rather than by a lump sum at the beginning of the contract. SaaS is more profitable after a few months, but Trakm8 cash flow took a short-term hit.
• There was an attack by short sellers, which drove down the share price.

This year is shaping up to be a whole lot better, something the market doesn’t seem to have caught up with yet.  For a start, even in 2016, orders rose by a remarkable 33%. But these orders were mostly won towards the end of the financial year, so the company won’t see the benefit until this year. Additionally, I expect to see the company getting the benefits of cutting costs and reducing debt.

I said at the beginning that there may be more to this company than meets the eye. What do I mean by that? Trakm8 itself will be acutely aware that we’re in the early stages of an automotive revolution. This involves, for example, self-driving, autonomous vehicles that will disrupt the old private ownership model. Within the next five years, instead of owning our own cars at enormous cost, we’re likely to see the evolution of mobility-as-a-service (MaaS), where if you want to get from A to B, you’ll call up a driverless taxi or rent a driverless vehicle that will take you to your destination. Autonomous taxi trials are already under way in Pittsburgh, Phoenix and Singapore.

To keep everyone safe, vehicles will be able to communicate with each other, and with elements of the transport infrastructure, such as traffic lights – the so-called connected vehicle. Research suggests that over 90% of all vehicles on the road will be connected to the internet as early as 2020.

The car manufacturers themselves are frantically positioning themselves to be at the centre of this ride-hailing autonomous-driving revolution. For example,  Ford has acquiring Livio and Chariot; BMW has partnered with RideCell and Zendrive; GM with flinc, lyft and Telogis; Daimler acquiring mytaxi; Volvo with Peloton; VW investing $300m in Gett; and Toyota has invested in Uber.

The carmakers are also investing heavily in connected vehicle  technology. Ford has invested in mapping (Civil Maps), LiDAR (Velodyne and Baidu), and computer vision (Nirenberg Neuroscience), while acquiring a start-up SAIPS for self-driving machine learning. And GM spent an eye-watering $1bn on Cruise Automation.

Meawhile, technology companies are spending billions to enhance their vehicle technology capabilities. German tier-1 ZF Group paid $12.4bn in 2015 for safety technology developer TRW and last year bought a 40% stake in vehicle-radar supplier Ibeo. In March, Samsung bought connected-car technology player Harman for $8bn

To build its automotive infotainment division. Qualcomm paid $47bn for NXP’s expertise in automotive chips followed by Intel buying Mobileye for $15.3bn. Verizon started a telematics spending spree with Hughes for $612m then adding Telogis for $930m followed by Fleetmatics for $2.4bn. Telogis had 300k subscribers, and Fleetmatics 700k; at over $3,300 per subscription, this makes Trakm8’s fleet business alone worth $220m (£166m) on that basis.

The colossal deal making is filtering down to smaller companies. In June, the Norwegian connected car platform provider ABAX was sold for $210m (£160m). Similar to Trakm8, ABAX develops and delivers a broad portfolio of SaaS telematics solutions for commercial vehicle fleet operators with revenue of NOK471 (£43m) and 350 employees.

The point I’m trying to make here is that telematics is at the heart of this transport revolution. Trakm8 not only has immensely valuable expertise in this area; it also has a huge accumulation of telematics data stored on its servers. In its latest trading update a couple of weeks ago, it said that 217,000 of its units are now reporting telematics data to its servers, an increase of 27,000 since the year end (2016: c. 177,000). This growth of 14% is attributed to a 6% increase in Fleet Telematics of 4,000 to 70,000 units and a 16% increase in Insurance & Automotive Telematics of 23,000 to 147,000 units.

I doubt whether most investors fully understand Trakm8’s place in the transport revolution. It isn’t just a purveyor of black boxes and cameras, It’s also a ‘big data’ company, which analyses the immense amount of data that it collects to develop intelligent algorithms that are then applied to create solutions for its customers in areas such as risk, vehicle maintenance, fuel optimisation, time inefficiency and crash alerts.

It will go on expanding its areas of expertise, both through its own R&D and by acquisition. However, there will be many predators out there that fully appreciate the company’s value. Perhaps the likeliest outcome sooner or later is that Trakm8 will be swallowed up by a larger bidder – to the benefit of shareholders.

More immediately, the company publishes its half-year results on 27 November. I’m confident that these results will show the company to be back on track, with no nasty surprises. If you like the sound of Trakm8, you should probably be on board before that date – encouraged by a prospective PEG ratio of under 0.4. Great value indeed.

BUY (107.5p; forecast yield: nil; market capitalisation: £38.4 million; initial stop-loss: 86p; EPIC: TRAK; sector: Communication & networking; classification: AIM; website: www.trakm8.com).  

We hope you enjoyed this this free share recommendation extracted from the latest edition of the premium Trendwatch newsletter…