Specialist circuit provider Trackwise Designs (LON:TWD) today issued a profit warning for both this year and next year as it cited tough market conditions for a decrease in profits. The share price was immediately punished, and lost 50%:
In common with many profit warnings recently, there has been a marked recovery from the initial low and anyone buying in at the bottom would have made a fine profit, albeit there is no real way to know you have bought the bottom until after.
Trackwise follows a number of other companies in dishing out the bad news after an IPO. That being said, the effects have not been too serious for longer-term investors. From an initial price of 105p, the shares have gyrated around but not made too much headway initially. A solid 2019 saw the share price track up to 150p, but today’s warning puts us almost back to the beginning.
Trackwise offer a unique, proprietary ‘Improved Harness Technology’ (IHT), which offers in theory an unlimited length circuit board, which potentially could be a disruptor to many industries such as Aerospace, Automotive and the Industrial sectors.
The warning comes as the company gives out its interim results today. Revenues have fallen overall, but the IHT division has seen an encouraging growth albeit from a lower comparative.
There are a lot of positive noises, but the outlook statement is poor, offering:
Market conditions have not improved since the half year and the Board now anticipates a material reduction in revenue and operating profit for the year in comparison to market expectations. While IHT revenues are expected to grow strongly in FY20, the Board expects next year to also be behind market expectations.
No mention is made of these expectations, but a look at the most recent broker note (available on Research Tree) indicates FY19 revenue £4.5m and profit £0.4m, and FY20 of £6.2m and £0.8m.
There are not many figures to go on, as Stockopedia only carries them from 2015 onward. It is clear that despite the big words, the business still is one in its infancy. The recent stock floatation has allowed it to raise money which has paid off its debt, allowed it to move into a larger facility and also invest in the new IHT product, which seems a legitimate use of funds.
It may be difficult at present to really assess the true meanings of the figures. It may be assumed that a decent amount of operational gearing may be present, meaning that operating expenses take up a far greater percentage of sales but the capacity is there to do much more, but making a break into the market is not easy. Clearly at the previous share prices investors have had full confidence in the company doing so, having paid up for growth in advance.
Relying on the broker note, it is very bullish about the recent collaboration with GKN, as they are the incumbent supplier for de-icing systems on the Boeing 787, which is one of the most popular models of aircraft in the world. Trackwise having a part of this potentially could be very lucrative, although it is not known how the revenues will break down. There may be another beneficial effect as Trackwise and the IHT product gains legitimacy from working with a known brand.
Back to what we can analyse. It is fair to say that this material reduction in revenues is likely to mean that cash disappears out of the company. In the first half, net cash generated from operations was £161k, although working capital movements made this look a bit better than what it was. By the time expected investments were made, £1.238m left the company, leaving a current cash balance of £1.565m.
So, solvency could become an issue. Net asset value is positive, but the real question is whether the downturn in trading would put pressure on the cash balances. No mention is made of loan facilities, but a revolving credit facility is open with the P2P lender Growth Street. This is quite an expensive arrangement, being charged at a rate of 10%. If there were to be further loans, there is only £1.26m of PPE on the balance sheet to secure it against.
Perhaps similar to IQE and its warning, your view on the shares here may depend on the views on the underlying technology. It may be the case that IHT has many applications, and the company may be able to exploit those successfully. In this case there may be a terrific upside for the shares.
For those without intimate knowledge of the products, many questions remain. It is clear that the new products require continued investment in order to develop them, and that money must come from somewhere. It does not look like current operations is enough to sustain that.
In addition, it is not surprise that a company like this has key customer concentration. From the latest annual report, the largest customer contributed 26% of revenues.
Stewardship looks good. The founder retains an impressive (although not majority) holding of shares, and unlike many other founders is not paying himself an incongruent wage relative to the size of the company.
However, the double profit warning is a little off-putting, and even the current share price is asking a lot of cash, and also sets up the share price for further falls in the case of additional warnings. With its technology well regarded a potential end game is for a larger company to simply acquire these assets on the cheap once there is a need for cash. 2/5.