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Progress in both divisions during H121

Trackwise Designs 29 September 2021 Update
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Trackwise Designs

Progress in both divisions during H121

H121 results

Tech hardware & equipment

29 September 2021

Price

230p

Market cap

£66m

Net cash (£m) 30 June 2021 excluding IFRS 16 lease liabilities

2.6

Shares in issue

28.7m

Free float

66.6%

Code

TWD

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.2)

(12.2)

32.8

Rel (local)

(1.1)

12.2

9

52-week high/low

370p

165.8p

Business description

Trackwise Designs is a UK manufacturer of specialist products using printed circuit technology. These include a lightweight replacement for conventional wiring harnesses known as IHT and RF antennae. In H121 25% of revenues related to exports.

Next event

FY21 results

March 2022

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Trackwise Designs is a research client of Edison Investment Research Limited

As flagged in its July trading update, Trackwise Designs’ H121 group revenues increased by 71% y-o-y to £4.1m, reflecting the acquisition of Stevenage Circuits in March 2020 and a doubling of IHT revenues, while adjusted EBITDA quadrupled to £0.5m. Management notes the group remains on track to meet market FY21 expectations despite supply chain disruption, so we leave our FY21 and FY22 estimates broadly unchanged.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

12/19

2.9

0.5

0.1

0.8

0.0

287.5

12/20

6.1

0.8

(0.4)

1.4

0.0

164.3

12/21e

9.0

0.9

(0.7)

(1.0)

0.0

N/A

12/22e

22.1

4.3

1.9

6.3

0.0

36.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

H121 results show progress in both divisions

H121 group revenues show progress in the improved harness technology (IHT) division, where revenues of £0.6m were 95% of the total reported for the whole of FY20, and in the advanced printed circuit board (APCB) division, where revenues were 6% higher than H220 despite supply chain shortages and the adverse impact of Brexit on trading with customers in mainland Europe. APCB profitability was adversely affected by supply chain shortages and coronavirus related disruption, which resulted in operational inefficiencies. Net cash (excluding IFRS 16 leases) reduced by £8.8m during H121 to £2.6m as management invested £8.7m in plant and property, primarily at the new Stonehouse site. The cash outflow and the remainder of the cost of fitting out the site is covered by the £12.6m raised in December 2020 through a placing and open offer. Management now expects the new site will start production in Q122. The site will be used for high-volume/low-mix IHT work, initially production for the electric vehicle (EV) OEM.

On track to meet FY21 market expectations

Management notes that while trading continues to be affected by supply chain constraints, it is coping with these pressures such that the group remains on track to meet FY21 market expectations. We therefore leave our FY21 and FY22 estimates unchanged except for a slight adjustment to our FY22 EPS estimate (from 6.4p to 6.3p) to reflect the exercise of options.

Valuation: Addressing several high-potential sectors

While our peer multiples-based analysis shows Trackwise trading at a premium to its peers on all metrics, this approach fails to recognise the potential of the IHT business so we have augmented it with a scenario analysis, which is presented in our initiation note. This explores how each of the three key segments in which Trackwise has developed prototype IHT products for customers (EVs, medical devices and aerospace) has the potential to generate revenues of at least £100m at even relatively modest levels of market penetration.

H121 performance

Half-on-half revenue growth in both divisions

As flagged in the company’s July trading update, H121 group revenues increased by 71% year-on-year to £4.1m, reflecting the acquisition of Stevenage Circuits (SCL) in March 2020 and a 131% jump in IHT revenues to £0.6m. The results show progress in both IHT and APCB activities. IHT revenues were 95% of the total reported for the whole of FY20 and were backed by deliveries to the UK EV OEM and an industrial customer. H121 revenues in the APCB division were 6% higher than H220 (this is a better comparator than H121 because SCL was acquired part way through H120), despite supply chain shortages and the adverse impact of Brexit on trading with customers in mainland Europe.

Profitability affected by supply chain shortages and coronavirus related disruption

Gross margin declined by 6.1pp compared with H220 to 29.0%. While Trackwise was able to pass price increases caused by supply chain shortages, particularly for copper, onto its customers, temporary shortages of materials and disruptions to working patterns caused by the coronavirus resulted in operational inefficiencies. Adjusted EBITDA reduced by £0.2m compared with H220 to £0.5m, in line with the July trading update. We estimate that around £0.1m of this reduction related to lower gross profit, the remainder to higher indirect costs as the group prepared for expansion onto the third site (see below) in FY22, for example appointing a Chief Operating Officer. The group generated an adjusted operating loss of £0.1m, in line with the July trading update, compared to an adjusted operating profit of £0.2m in H220.

Cash outflow related to new Stonehouse site

Net cash (excluding IFRS 16 leases) reduced by £8.8m during the period to £2.6m at end June 2021. Working capital requirements increased by £1.2m, around half of which was attributable to a rise in debtors. Capital expenditure was £8.7m which includes £2.7m of deposits for equipment which is allocated in Other Receivables. An estimated £1.2m of the expenditure related to SCL to further improve capacity and efficiency, the bulk of the remainder to the acquisition and fitting out of the new Stonehouse site. This value is higher than our full year estimate because management intends to refinance some of the equipment on leases. In August management completed a £2.0m mortgage facility and agreed a £1.3m asset financing facility, which is currently undrawn. We model a £5.4m increase in borrowings during FY21 to cover this.

Stonehouse site provides capacity for high-volume/low-mix IHT

In May 2021, Trackwise acquired a 6,947m2 freehold property in Stonehouse, Gloucestershire, for £2.8m. Management expects that the site purchase and expenditure on associated equipment will collectively total around £9m, which is being funded from the £12.6m raised in December 2020 through a placing and open offer. The company is in the process of installing an automated roll-to-roll IHT production line at the site. While the site was originally intended to be fully operational by the end of December 2021, the schedule has been delayed by a few weeks, moving the start of production to Q122. Once operational, the Stonehouse site will be used for high-volume/low-mix IHT work, initially production for the EV OEM, and the 1,812m2 Tewkesbury site for low-volume development projects. The Stonehouse site has capacity for the installation of a second line in the future.

Outlook

On track to meet market expectations for FY21

Management notes that while current trading continues to be affected by supply chain constraints, it is coping with these pressures such that the group remains on track to meet market expectations for FY21. The issue with availability of copper-clad substrates experienced in the first half has eased and the company has been successful in passing on price increases to its customers, so we expect gross margin to improve during the second half. In fact, the APCB division’s order book is strong (£2.2m+ with a pipeline of new order opportunities of over £3m), encouraging management to add a second shift during H221 to meet production demand. We therefore leave our FY21 estimates broadly unchanged since we treat the additional deferred tax provisions as exceptional items. We also leave our FY22 estimates broadly unchanged except for a slight adjustment to the average number of shares in issue following the exercise of options in July and September, which reduces our FY22 EPS estimate from 6.38p to 6.31p. However, we move some depreciation from indirect to direct costs, in line with the company’s treatment. This has no effect on either our FY21 or FY22 PBT estimates but reduces gross margins from 34.6% to 32.4% in FY21 and from 35.5% to 33.0% in FY22.

EV OEM ramp-up underpins FY22 estimates

In June 2021 Trackwise announced that the volume ramp-up for the programme with its UK EV OEM customer was delayed by a quarter to early FY22 and that the customer had extended the term of the manufacture and supply agreement from three to four years, raising the aggregate value for the contract by £16m to up to £54m. This potentially represents IHT revenues of £16–17m in FY23 and FY24. The level in FY22 will depend on the rate of ramp-up during Q122 and, according to management, could be as high as £16m. Our estimates already take a cautious approach, modelling £13m EV revenues in FY22. The EV opportunity continues to expand as Trackwise supplies early-stage samples to other companies in the EV sector including responding to a request from a large European OEM for cell-to-pack interconnect flex up to 2.4m in length, which is ideal for roll-to-roll manufacture.

Volume IHT production for medical sector presents upside to FY22 estimates

Trackwise is working with seven medical catheter manufacturers. The samples for medical devices that Trackwise shipped in FY20 to its lead catheter company, which is a large US medical OEM, are working as designed in trials. Management expects to receive further development orders from this customer in FY21 ahead of potential production revenues in FY22. (We treat the production revenues as upside to our FY22 estimates.) As discussed in our May flash note, Trackwise has signed a seven-year agreement with CathPrint, which has created a novel technique for manufacturing advanced catheters. Assuming the ongoing development project supplying IHT to CathPrint is successful, this potentially represents sales of significant volumes of IHT for medical applications for a five-year period from FY23 onwards.

Aerospace still expected to be largest sector in the longer term

Trackwise is working with over 30 aerospace OEMs and suppliers including GKN on a system for preventing ice forming on aircraft wings, four developers of electric vertical take-off and landing vehicles (eVTOLs), two developers of business jets and two developers of high-altitude pseudo-satellites (HAPS). The company is working on multiple independent projects with a European aerospace OEM including a flying wing demonstrator. Management estimates that one or more of the projects in this sector could progress to production revenues within two to three years.

Valuation

Peer multiples

Trackwise’s share price has risen by over 50% since the 170p low reached in July 2021 following the announcement of the delay to the EV OEM ramp-up in June, its lowest point since the announcement of the series production order for the EV manufacturer in September 2020. At current levels, our peer multiples-based analysis shows Trackwise’s shares trading at a premium to the sample means on all metrics, implying investor confidence in the IHT opportunity. Based on our estimates, which benefit from a strong ramp-up of IHT revenues in FY22 and a full year of revenues from SCL in FY21, Trackwise is expected to grow revenues much more strongly than any of the sample between FY20 and FY22. This is not surprising given that the companies in the sample are well-established businesses similar to Trackwise’s APCB activity, while the IHT business has the potential to deliver growth that is faster than the average for our sample. That is not just for the period covered by our estimates, but for at least several years beyond that, so the peer multiples-based approach fails to recognise the potential of the IHT activity in the longer term. Although we do not present detailed FY23 estimates, we provisionally estimate that expansion could support FY23 revenues of at least £33m. We therefore supplement the peer multiples approach with a scenario analysis.

Exhibit 1: Peer multiples

Name

Market Cap m ($)

EV/Sales 1FY (x)

EV/Sales 2FY (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

PE 1FY (x)

PE 2FY (x)

CAGR

EBITDA margin 1FY

EBITDA margin 2FY

AT & S

1,511

1.4

1.1

6.9

5.0

31.7

16.0

18.8%

20.4%

23.2%

CMK

256

0.5

0.5

6.8

4.9

20.1

9.2

10.1%

7.6%

9.9%

Compeq Manufacturing

1,642

0.8

0.7

4.4

3.8

9.5

8.0

6.0%

17.9%

18.9%

Ibiden

8,460

2.5

2.3

8.4

7.0

24.9

20.1

14.8%

29.9%

32.8%

KCE Electronics

2,923

6.6

5.7

26.5

21.8

40.8

31.7

22.2%

24.9%

26.1%

Meiko Electronics

772

1.0

0.9

7.9

7.3

10.3

9.1

12.7%

13.0%

13.0%

Tripod Technology

2,217

0.9

0.8

4.7

4.2

9.8

8.9

8.4%

18.3%

19.3%

TTM Technologies

1,351

0.8

0.7

6.0

5.6

9.7

8.3

4.7%

13.0%

13.3%

Unimicron Technology

7,487

2.4

2.0

12.0

8.6

22.4

16.7

16.2%

19.6%

23.1%

Zhen Ding Technology

3,466

0.8

0.7

4.5

3.8

10.5

8.8

12.6%

17.5%

18.7%

Mean

1.8

1.6

8.8

7.2

19.0

13.7

18.2%

19.8%

Trackwise Designs

91

6.1

2.5

64.4

12.8

N/A

36.4

90.9%

9.4%

19.3%

Source: Refinitiv, Edison Investment Research. Note: Prices at 27 September 2021. *CAGR is compound average growth in revenue between year 0 and year 2.

Scenario analysis

In our initiation note, we presented a scenario analysis that looked at the potential revenues achievable if the company was successful in penetrating specific target markets. This approach showed that the three key segments in which Trackwise has developed prototype IHT products for customers (EV, medical devices and aerospace) each has the potential to generate revenues of at least £100m at relatively modest levels of market penetration. The contract with the EV manufacturer announced last September is the first demonstration of uptake of the technology at scale. This means that the share price is very sensitive to any news regarding the relationship with this customer, for example falling from 226p to 190p on 22 June when the delay to the EV OEM ramp-up was announced.

Exhibit 2: Financial summary

£'m

2019

2020

2021e

2022e

31-December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

2.9

6.1

9.0

22.1

Cost of Sales

(1.8)

(4.4)

(6.1)

(14.8)

Gross Profit

1.1

1.7

2.9

7.3

EBITDA

 

 

0.5

0.8

0.9

4.3

Normalised operating profit

 

 

0.2

(0.2)

(0.5)

2.4

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.0)

(0.1)

0.0

0.0

Share-based payments

(0.2)

(0.2)

(0.3)

(0.3)

Reported operating profit

(0.1)

(0.5)

(0.8)

2.1

Net Interest

(0.1)

(0.2)

(0.2)

(0.5)

Exceptionals

0.0

1.1

0.0

0.0

Profit Before Tax (norm)

 

 

0.1

(0.4)

(0.7)

1.9

Profit Before Tax (reported)

 

 

(0.1)

0.4

(1.0)

1.6

Reported tax

0.1

0.8

0.3

0.3

Profit After Tax (norm)

0.1

0.3

(0.3)

1.8

Profit After Tax (reported)

(0.0)

1.2

(0.7)

1.9

Basic average number of shares outstanding (m)

14.7

20.7

28.6

28.7

EPS - normalised (p)

 

 

0.8

1.4

(1.0)

6.3

EPS - diluted normalised (p)

 

 

0.8

1.4

(0.9)

6.1

EPS - basic reported (p)

 

 

(0.3)

6.0

(2.5)

6.5

Dividend (p)

0.0

0.0

0.0

0.0

Revenue growth (%)

(16.2)

108.8

48.5

145.4

Gross Margin (%)

37.9

28.3

32.4

33.0

EBITDA Margin (%)

17.8

12.7

9.4

19.3

Normalised Operating Margin

6.9

N/A

N/A

10.8

BALANCE SHEET

Fixed Assets

 

 

6.8

14.7

24.5

24.2

Intangible Assets

4.3

6.5

7.2

7.8

Tangible Assets

2.5

8.2

17.3

16.4

Investments & other

0.0

0.0

0.0

0.0

Current Assets

 

 

3.1

18.5

12.9

17.2

Stocks

0.6

2.0

2.2

3.6

Debtors

1.7

1.8

2.1

4.5

Cash & cash equivalents

0.6

13.9

7.8

8.2

Other

0.3

0.8

0.8

0.8

Current Liabilities

 

 

(1.4)

(3.0)

(2.3)

(4.1)

Creditors

(1.0)

(2.0)

(1.2)

(3.0)

Tax and social security

0.0

0.0

0.0

0.0

Short term borrowings (including lease liabilities)

(0.3)

(1.1)

(1.1)

(1.1)

Other

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(2.5)

(5.3)

(10.7)

(10.7)

Long term borrowings (including lease liabilities)

(1.3)

(4.1)

(9.5)

(9.5)

Other long term liabilities

(1.3)

(1.2)

(1.2)

(1.2)

Net Assets

 

 

6.0

24.9

24.5

26.6

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

6.0

24.9

24.5

26.6

CASH FLOW

Op Cash Flow before WC and tax

0.5

0.8

0.9

4.3

Working capital

0.1

(0.6)

(1.3)

(2.0)

Exceptional & other

0.0

(0.6)

0.0

0.0

Tax

0.0

0.7

0.3

0.3

Net operating cash flow

 

 

0.6

0.3

(0.1)

2.6

Capex

(2.7)

(3.2)

(5.8)

(1.6)

Acquisitions/disposals

0.0

(1.6)

0.0

0.0

Net interest

(0.1)

(0.2)

(0.2)

(0.5)

Equity financing

0.0

17.3

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.2

0.1

0.0

0.0

Net Cash Flow

(2.0)

12.7

(6.1)

0.5

Opening net debt/(cash)

 

 

(2.3)

1.0

(8.8)

2.8

FX

0.0

0.0

0.0

0.0

Other non-cash movements

(1.3)

(2.9)

(5.4)

0.0

Closing net debt/(cash) including lease liabilities

 

1.0

(8.8)

2.8

2.3

Lease liabilities

0.7

2.6

8.0

8.0

Closing net debt/(cash) excluding lease liabilities

 

0.3

(11.3)

(5.2)

(5.7)

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Trackwise Designs and prepared and issued by Edison, in consideration of a fee payable by Trackwise Designs. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by Trackwise Designs and prepared and issued by Edison, in consideration of a fee payable by Trackwise Designs. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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