Soleimani bounce

The stock market seems to be brimming with optimism at the moment. After the assassination of Iranian bad dude Qasem Soleimani led to an extremely short-lived panic on Monday (which only seemed to affect the US market after hours), the markets are buoyant now that further escalation is looking less likely. At the moment I’d guess that we’re probably in for another good year with the likely re-election of Trump and a likely improvement in global economic growth in the horizon. 

My portfolio has made a decent start, with good trading updates from Liontrust, Churchill China and JD Sports this week. Hopefully this run will continue as I have a whole host of results coming in the second half of January.

Markets aside, January is feeling a bit grim this year. An overly indulgent but short winter break from a demanding work project this year has left me with a case of the January blues and in need of a fitness drive. I am finding it a bit difficult to muster the energy for blogging on my commute. I’m hoping this will be temporary and I’ll recover some energy after catching some winter sun later in January.

I have quite a few trades to update on. Back in December I sold RWS for a 25% profit and bought a position in Best of the Best. Two weeks ago I reluctantly sold out of AB Dynamics as momentum had weakened significantly. I made a 23% profit on AB Dynamics overall, which seems a little disappointing given how well it was doing previously – unfortunately some of my top-ups last year turned out not to be well-timed. The proceeds mostly went into Tracsis. I then made an additional opportunistic trade swapping RELX for Beeks Financial last week.

I’ve written about Beeks Financial and Best of the Best before, so won’t do so again here. Both look cheap and appear to be experiencing an upturn in trading (and share price momentum) following minor wobbles. Both are very small businesses and somewhat risky but appear to have a lot of upside potential.

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Tracsis

Tracsis is a UK software business focused on the transportation sector. I’ve been aware of it for quite a while but only started to dig a bit deeper recently.

It was established in 2004 and originally specialised in software for rail operations and infrastructure asset management, specifically targeted at helping UK rail franchisees manage their operations. Since then it has expanded through acquisition to also provide traffic surveys and analytics more broadly across different modes of transport and geographies. Traffic & data analytics is now the larger segment by revenues though rail operations delivers the majority of the profits. It continues to actively pursue a ‘buy and build’ business model, acquiring small niche businesses that complement its overall offering.

Quality

  • Business economics: Tracsis is capital-light, profitable and generates lots of cash. Operating margins are decent, fluctuating between 15% to 20%. Returns on capital are superficially not that exciting, generally fluctuating between 10% to 20%. However, these returns understate Tracsis’s underlying profitability as they are suppressed by fairly regular acquisitions. Cash flow conversion excluding acquisitions is very high.
  • Track record: the track record is decent. Tracsis has grown revenues at a fairly rapid rate and consistently generated plenty of cash. The share price has appreciated considerably over the past 10 years and the results have largely been consistent with only one very minor hiccup in recent years as far as I can see, from delays in signing rail contracts in 2017. This doesn’t seem to be a cause for concern.
  • Competitive advantage: Trasis acknowledges there to be some difference in competitive conditions across its two business areas. Rail operations appears to a less competitive niche, where Tracsis appears likely to benefit from sector-leading IP and long contracts with ‘sticky’ customers, who due to the importance and complexity of the software products are likely to face significant switching costs. However, high customer concentration means there is an outside chance of losing a big proportion of revenues. Traffic and data analytics is a larger and more competitive market where Tracsis has lower margins and has alluded to competitive pressure on pricing in the past. That said, even this market doesn’t  seem to be especially competitive. Client relationships and bespoke IP are important and Tracsis seems to have a good track record of doing well by its clients so far.
  • Growth prospects: Tracsis is reasonably small and there still seems scope for plenty of growth. Tracsis points out in its annual report that its market benefit from several secular growth drivers: increasing urbanisation, improvements in data analytics technology and pressure to improve performance of transportation. This makes sense to me. More immediately these seems to be plenty of scope for further acquisitions and organic growth, particularly in geographic markets where Tracsis does not yet have much of a presence.

Price

Momentum is good, with Tracsis’s last results looking very decent and the share price recently breaking out to new highs. The valuation seems reasonable given the growth prospects.

 

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