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Tracsis is in the process of a significant transformation, moving from perpetual licence fees to more reliable recurring revenues.

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A Pivot Towards Recurring Revenue

Tracsis (TRCS), a transport technology group, is in the midst of major operational changes. The firm has historically relied on perpetual licence fees – a one-time software payment. However, the management is now shifting towards a model of more predictable recurring revenues.

This shift is a primary reason for the turnover fall in the six months leading up to January’s end. Tracsis had a £1.2mn perpetual software licence deployment in H1 of 2023, which naturally did not recur in the same period this year.

The company plans to expand its footprint in North America, where such one-off payments are standard in the rail industry software. However, as it introduces a recurring, software-as-a-service model, Tracsis warns of potential volatility in this market.

Exceptional Costs and Profitability

Transformation comes at a cost. Tracsis incurred £1.3mn in exceptional cash costs in the first half, which impacted its statutory profit. These costs were tied to revamping the operating model, reducing headcount, and restructuring the business to cater to a rapidly growing pipeline.

In light of these changes, the management had indicated that revenue growth in FY2024 would lean towards the second half. Thus, these interim figures should not surprise investors.

Analyst Perspective and Investment Potential

Despite the drop in revenue and profit, Tracsis is currently on a forward P/E multiple of nearly 21 times according to FactSet broker consensus. This multiple may seem high, doubly so given the current transition phase.

However, it’s essential to note that Tracsis remains in a net cash position, providing scope for potential acquisitions. Moreover, it operates in a growing sector. The rail industry is ripe for modernisation and improvement, opening up opportunities for a firm like Tracsis.

With these factors in mind, a cautious buy rating is a reasonable stance. Investors need to be aware of the transition risks and potential volatility, particularly in the North American market. Yet, the shift towards recurring revenue and the growth potential in its sector make Tracsis an attractive proposition despite its current challenges.

Key Figures

• Order Price: 845p
• Market Value: £255mn
• Dividend Yield: 0.3%
• P/E Ratio: 54
• Net Asset Value: 225p
• Net Cash: £14.5mn

Six months to 31 Jan:

• Turnover (£mn): 36.6 (2024) vs 39.2 (2023)
• Pre-tax profit (£mn): -0.27 (2024) vs 2.26 (2023)
• Dividend per share (p): 1.10 (2024) vs 1.00 (2023) - a 10% increase.