Paul Scott's review5 Jul 2016 11:15
Trakm8 Holdings (LON:TRAK)
Share price: 255p (up 8.5% today)
No. shares: 32.3m
Market cap: £82.4m
Results y/e 31 Mar 2016 & contract win - for the avoidance of doubt, I don't currently hold this share, but am mulling whether to buy back in or not. The headline figures today look really good, and have benefited from 2 acquisitions in the year - both of which have been profitable so far.
Adjusted EPS comes out at 13.44p, up an impressive 115% on last year. Although note that this is flattered by a negative tax charge. The rest of the results are self-explanatory, so I won't regurgitate that here.
It probably adds more value if I outline the Q&A session that I had with the Chairman & FD this morning, to answer my particular queries on the results statement. Call me old fashioned, but personally if I have queries about a company's accounts, then I pick up the phone and ask the company for an explanation. I then assess whether or not the explanation makes sense.
1) Debtors of £7.6m looks high relative to turnover of £25.6m. Normally I would expect debtor days to be about 60 days. So (including some VAT in debtors), that suggests to me debtors should be around £6m. Therefore it looks as if there's a an excess of about £1.6m in debtors, above a normal level, which could indicate problems.
The explanation from management is that RM was acquired near the year end, and therefore it contributed little to the P&L, but the full year end debtors are consolidated into the group accounts. Furthermore, RM is a project-based business, so tends to accumulate large debtors, which are then periodically paid in large lumps.
I was one of several commentators who looked up the pre-acquisition accounts of RM, and found them utterly bizarre! TRAK confirmed today that they have revised RM's accounting treatment, to make their revenue recognition much more conservative.
Putting a figure on it, the impact of RM debtors on the group accounts is about £1m, of the £1.6m which is my estimate of the unusually high element of TRAK's debtors.
There was also a £250k impact on debtors from one particular client contract which is payable over an extended time period, as agreed with the customer. I think some of this should probably be moved from current assets into non-current assets - the element which is receivable after 12 months from the year end.
Overall then, these factors are a satisfactory explanation as to why year end debtors is somewhat higher than normal.
2) Development spending - the group capitalised £1.9m of development spending during the year. The amortisation charge for previously capitalised development spending was c.£800k. Therefore you could argue that reported profit is flattered by £1.1m.
Personally I prefer a conservative view of development spending, writing it all off to the P&L as incurred. Therefore I would adjust the profit down by £1.1m when valuing the company.
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