Small-Cap Stock Picks

Tech minnow Tracsis is going places

Leeds-based transport software specialist Tracsis is a small company intent on going places, having recently completed its second acquisition since its 2007 AIM float and issued an upbeat trading missive.

Providing a range of operational planning software and consultancy services to most of the large rail and bus operators, Tracsis has acquired Peeping, a provider of invaluable services to train operators including station footfall counts and rail-related surveys.

CEO John McArthur describes the acquisition of this ‘demand data’ specialist, a cash and shares-based transaction capped at £575,000 and involving minimal dilution for existing investors, as a ‘win, win, win type deal’.

He says Peeping, whose employees are all ex-railway professionals and which had healthy EBITDA of £153,000 on £432,000 sales in its last financial year, strengthens Tracsis’s standing and earnings potential within a rail industry that is highly supportive of the merger.

Tracsis, which reported improved pre-tax profits of £249,000 (2008: £95,000) at the interim stage in April, has also assured followers that it delivered ‘substantial growth in both profits and revenue, both organically and through acquisition’ in the year to July.

Recession is putting extra pressure on its transport industry clients to deliver a better service while reducing inefficiencies and costs, playing into the hands of Tracsis, whose August 2008 acquisition, the consultancy services business RWA Rail, has been successfully integrated.

A profitable operator shrugging off economic slowdown and strengthening its hand in a lucrative niche, Tracsis shares, priced at 50.5p and valuing the business at less than £10 million, are an attractive long-term buy.

XP Power calls market bottom

James Peters, deputy chairman of power supply products maker XP Power, says the bottom of the market may have already passed.

In the first half of 2009, Singapore-headquartered XP suffered from contraction in the electronics market, with sales easing off by 5 per cent to £33.1 million. However, Peters believes the market bottomed ‘in May and June’, with some industrial customers beginning to order stock again during that period, ‘although not at previous levels’.

Despite the arduous market, an increasing flow of its own products into the sales mix – more than 80 per cent of XP products sold are now under its own brand – meant gross margins expanded from 42.8 per cent to 45 per cent in the six months to June and profits after tax, though adjusted for exceptional costs and foreign exchange gains, were flat at £3.5 million. The cash-generative company pared borrowings back by £2.8 million to £20 million and maintained its interim dividend at 10p.

Peters says that a lot more of XP’s own IP will flow through in coming years and, with a new, much larger factory in China opened in June, this ‘should move us towards 50 per cent margins in the next three years’.

Although XP Power is experiencing some margin pressure, as labour and materials inflation emerges in Asia, the company looks well placed for sustained growth, and house broker Investec forecasts 12 per cent earnings growth to 38.3p this year.

At the present 292p, XP shares, trading on less than eight times this year’s earnings and offering a generous yield, represent good value. Buy and stash away.

Resilient Matchtech holding its own

Technical recruiter Matchtech is coping reasonably well with recessionary challenges, having issued an update for the year to July containing several bright spots.

Supplying staff to the private and public sectors via its engineering, ‘built environment’ and professional services divisions, Matchtech traded in line with (admittedly downgraded) forecasts last year. Reflecting recessionary pressures, net fee income (NFI) declined by 9 per cent to £30.2 million, with management noting a pronounced drop-off in demand for permanent placements in the second half. Permanent fees were 24 per cent lower at £8.3 million with the ‘built environment’ sector seeing the sharpest annual decline at 52 per cent.

Encouragingly, however, NFI from contract placements, increasing as a proportion of NFI from 67 to 73 per cent, held up at £21.9 million, although contract margins ‘remained under pressure’. In addition, Matchtech continued to churn out cash last year, paring net debt from £3.7 million at the half-year to a lowly £1.3 million at the year-end. Quick to address its cost base, the company says it has reduced its headcount by 20 per cent since December.

Though near-term trading is likely to remain tough, Matchtech is a business with a greater underlying resilience than many peers, stemming from its focus on clients operating in publicly funded defence, transport and infrastructure sectors. Consensus estimates for July 2009 – results are out in October – suggest a pre-tax profit decline from £12.8 million to £10.8 million, producing earnings of 40p, with analysts expecting a maintained dividend of 15.6p.

Backed here last summer at 267.5p, the shares have fallen back significantly to 141.5p, at which they trade on just 3.5 times last year’s likely earnings and offer a yield of 11 per cent. Sold down from a £5 AIM peak, investors still on board should not sell at these depleted levels – sit tight or average down while the shares are dirt-cheap.

New customer wins for Cyprotex

Drug discovery screening specialist Cyprotex, whose speculative attractions we flagged up here at 4.75p in July, is lining up new customers, markets and potential takeovers after trebling interim profits to £157,000.

The Macclesfield-based company increased turnover by a more modest 9 per cent to £2.45 million in the six months to June, but chief executive officer Dr Anthony Baxter, who founded the Argenta drug discovery group, explains that operational gearing sends 80p of every extra pound in revenue straight to the bottom line.

AIM-listed Cyprotex has won three large new corporate customers, initially reducing its dependence on its largest single customer from 29 to 20 per cent of turnover, and has spent nearly £500,000 all told on a new mass spectrometer to improve its metabolite identification services, an investment that Baxter says has already paid for itself and could generate £1 million of extra annual turnover.

Cyprotex, whose chief role at present is as an outsourced service supplier to pharmaceutical companies, is making more of its software accessible online and hopes that charging for this could at some stage contribute 20 per cent of revenues, when it has a targeted four to five software packages on offer. The company is actively looking at a significant potential acquisition in the USA, as well as smaller targets nearer home. And having raised £1 million at a depressed 2.5p last August and ended June with cash up sixfold at £1.7 million, it has the financial firepower to do deals.

Baxter has strengthened the management team with a new chief financial officer, chief commercial officer and business development manager. House broker Noble sees full-year pre-tax profits rising nearly 30 per cent to £900,000, with £1.1 million on the cards for 2010.

After a disastrous early stock market history, Cyprotex shares have fluctuated between 2p and 6.25p over the past 12 months. They have edged up to 4.88p since our recommendation last month and could go further. Consider topping up existing holdings.