North American Expansion Will Open New Market Opportunities

Key Takeaways

• Expansion into North America and focus on recurring revenue aims to boost revenue and market presence, mitigating single-market risk.
  
• Operational restructuring and technological advancements could enhance margins and align with public transit trends to drive revenue growth.
  
• Government initiatives and internalizing solutions by clients may disrupt Tracsis’ revenue, compounded by election, cost, and conversion challenges impacting financial performance.

Catalysts

Provides software and hardware, data analytics/GIS services for the rail, traffic data, and transportation industries in the United Kingdom, Ireland, rest of Europe, Europe, North America, and internationally.

• The launch of a new train dispatch product in North America establishes a new growth vector, likely to boost revenue as Tracsis expands its market presence in the region.
  
• The strategic focus on increasing annual recurring revenue, with a significant 10% growth in the Rail Technology business, indicates a push towards stable, predictable revenue streams, likely enhancing future revenue and profitability.
  
• Transformation actions, including operational restructuring and investment in a global delivery model, are expected to reduce costs and improve margins, which could positively impact net margins in the upcoming years.
  
• Expansion into new geographies, particularly the United States, with a strategy to replicate U.K. business successes, could diversify revenue sources and enhance overall earnings, mitigating risks associated with a single market focus.
  
• The smart ticketing and data analytics advancements align with governmental trends, positioning Tracsis to capture increased revenue opportunities as public transportation systems evolve, potentially driving higher revenue and improved earnings.

Tracsis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tracsis's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 7.7% in 3 years time.
• Analysts expect earnings to reach £7.2 million (and earnings per share of £0.21) by about February 2028, up from £488.0 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 63.3x on those 2028 earnings, down from 236.7x today. This future PE is greater than the current PE for the GB Software industry at 32.5x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Tracsis Future Earnings Per Share Growth

Risks

• Tracsis' financial performance in FY '24 underachieved due to the U.K. general election and slow pipeline conversion in North America, which could impact revenue and earnings.
  
• The company's Data, Analytics, Consultancy & Events division experienced a sharp decline in margins, necessitating strategic cost adjustments, likely impacting net margins.
  
• There is a risk of non-repeat revenue from perpetual licenses and existing contracts going in-house by customers, potentially affecting recurring revenue streams.
  
• Rising wage costs and national insurance may present a short-term EBITDA and margin headwind, especially impacting the Traffic Data & Events segment.
  
• Government-led nationwide solutions (e.g., Great British Railways) could potentially displace Tracsis' offerings, risking revenue loss if alternative suppliers are chosen.

Valuation

• The analysts have a consensus price target of £11.723 for Tracsis based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £94.0 million, earnings will come to £7.2 million, and it would be trading on a PE ratio of 63.3x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of £3.8, the analyst price target of £11.72 is 67.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.