Tracsis

LONG-TERM BUY

19/12/2011 Miles Nolan

AIM-listed Tracsis is a leading provider of resource optimisation planning software, largely used by the rail industry. Originally developed with the aid of academics at Leeds University, the niche products it sells have gained huge traction. 

In the UK alone it works for 14 of the 20 train operating companies (TOCs), including Virgin Trains, First and National Express. It takes 18 months to bring a train driver up to speed, but a report produced for the Office of Rail Regulation and the DTI earlier this year revealed that only 44 per cent of their time is spent driving. 

Software accounts for a third of revenues, with its TrainTRACS product being the market leader. It allows TOCs to efficiently plan and optimise the deployment of crew within their network. This used to be done manually but using complex algorithms. Tracsis has developed a solution, which is now firmly embedded with its clients – providing solid recurring revenue.

Contracts typically range from one to five years’ duration, with annual licence fees up £50,000 to £110,000. Tracsis estimates that the savings of using its products can be as high as £5 million a year, so it’s little wonder that so many majors are clients.

A further extension of this product is TRACSRoster, a software package for both short- and long-term crew rostering. This takes into account hours worked, holidays and rail-specific legislation, allowing the TOC to provide a daily work schedule.

Since joining the market in 2007 Tracsis has done a good job of organic growth by cross-selling its products, but it has also completed four acquisitions. Two years ago it acquired the software package COMPASS, which manages performance and event data in operations as well as safety functions.

Prior to this, Tracsis moved into the consultancy market with the purchase of RWA Rail. Based in Derby, it provides strategic and operational planning advice to rail operators. It has a strong relationship with a major rail infrastructure operator, providing expertise such as network capacity planning, timetable organisation and demand forecasting.

To help gain an even closer relationship with its customers Tracsis went on to acquire Peeping, which is the leading provider of passenger counting. Using former rail operatives it counts and records passenger numbers, helping to assist in planning and punctuality.

The most recent deal was the acquisition of hardware-focused MPEC for up to £3 million. It is a niche developer of data logging and remote monitoring technology to the rail industry. Indeed, its main product, SA380, is used to observe critical trackside infrastructure such as signals and level crossings. Due to the safety aspect of its work it is a ‘must have’ so margins are high – in the year to March 2010 it notched up pre-tax profits of £266,454 on sales of £818,813.

By monitoring in real time, maintenance operators can improve their efficiency by better planning, in turn reducing delays and faulty equipment. MPEC also takes Tracsis into Australia, a market where it sees great opportunities. Other overseas territories are also under consideration.

Operating in a fragmented market, the likelihood is that more acquisitions will follow. It recently raised £1.95 million at 45p in a placing with new institutions to help strengthen the balance sheet. With a wealth of experience in optimisation software, other markets it could target include freight logistics, heavy rail freight, passenger airlines and even shipping/port authorities.

Energetic chief executive John McArthur remains highly ambitious: ‘We are really starting to build momentum and have a great opportunity to build Tracsis into a sizeable business.’ With net cash approaching £5 million (25p a share) and the recent purchase of a £450,000 property, the shares have good asset backing.

As a niche operator, Tracsis offers investors exposure to a high-margin business with a chunky level of repeat business. Two directors picked up stock in September, and our advice would be to follow their lead. Buy.

Tags: AIM-listed, Cash rich, Growth Company awards, John McArthur

Sector: Software & Computer Services

Companies: Tracsis

Market cap: £13.9m

PE Forecast: 13.1

Share price: 57.75p