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Strategic progress in challenging environment

Trackwise Designs 29 June 2021 Update
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Trackwise Designs

Strategic progress in challenging environment

FY20 results

Tech hardware & equipment

29 June 2021

Price

205p

Market cap

£58m

Net cash (£m) at 31 December 2020 (excluding £2.6m IFRS 16 leases)

11.3

Shares in issue

28.4m

Free float

67.6%

Code

TWD

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(14.6)

(15.3)

145.1

Rel (local)

(15.0)

(19.3)

106.9

52-week high/low

370p

84p

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 FY20, 39% of revenues related to exports.

Next event

AGM

14 July 2021

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Trackwise Designs is a research client of Edison Investment Research Limited

Trackwise Designs’ FY20 results show a resilient response to the pandemic while management expanded IHT capacity to meet the requirements of a multi-million order from an undisclosed UK electric vehicle (EV) OEM. This OEM has recently extended its supply and manufacture agreement with Trackwise from three years to four, increasing the total value by £16m to up to £54m. We note that the volume ramp-up under this agreement has been delayed by a quarter to H122, so we have revised our FY21 estimates, taking EPS from 4.9p profit to 1.0p loss.

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

N/A

12/20

6.1

0.8

(0.4)

1.4

0.0

N/A

12/21e

9.0

0.7

(0.7)

(1.0)

0.0

N/A

12/22e

22.1

4.2

1.9

6.4

0.0

32.1

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

Doubling in revenues following SCL acquisition

FY20 revenues increased by £3.2m year-on-year to £6.1m, reflecting the acquisition of Stevenage Circuits (SCL). SCL has become the group’s centre for advanced printed circuit board (PCB) manufacture, freeing the Tewkesbury site for improved harness technology (IHT) production. However, concerns about the long-term economic impact of the pandemic caused a slowdown in new orders for both the advanced PCB and IHT divisions. After adjusting for exceptional costs and share-based payments, the group moved from an operating profit of £0.2m in FY19 to a £0.2m loss. The balance sheet benefited from fund-raisings in March 2020 and December 2020 generating £18.5m (gross). Part of the proceeds was used to acquire SCL, and part is being used to purchase and equip a new site in Stonehouse, Gloucestershire, which will also be dedicated to IHT production.

Additional IHT capacity for EV programme

The additional IHT capacity is needed to meet the requirements of the UK EV OEM with some surplus to accommodate the potential demand from the medical sector, which could lead to volume shipments from FY22 onwards. Since the group is already incurring some of the cost associated with the capacity increase, management expects that the quarter’s delay in ramping up volumes for the EV programme is likely to result in an operating loss during FY21.

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 September 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.

FY20 performance indirectly affected by pandemic

Suppliers and customers adversely affected by pandemic

Production continued at both the Stevenage and Tewkesbury sites throughout the coronavirus lockdowns, so the main impacts of the pandemic were indirect and related to how the pandemic affected both suppliers and customers. Group revenues increased by £3.2m year-on-year during FY20 to £6.1m, reflecting the acquisition of SCL which completed in April 2020. IHT revenues reduced by £0.3m to £0.6m because the pandemic delayed installation of equipment needed to complete product for a medical customer. This equipment was commissioned during H220 and samples were shipped (see below). Similarly, delays during H120 in installing equipment at the EV customer’s site caused slippages to its production schedule and adversely affected call-offs. Concerns about the long-term economic impact of the pandemic resulted in a slowdown in new orders for both the advanced PCB and IHT divisions. This situation was exacerbated towards the year end by supply chain issues affecting its customers’ ability to source electronic components, leading to them placing orders for lower volumes of circuits.

Gross margin declined by 9.6pp to 28.3%, reflecting low levels of equipment utilisation, particularly in H120. Excluding share-based payments and exceptional costs, administrative expenses increased by £1.0m to £1.9m because of the additional costs associated with SCL. After adjusting for exceptional costs and share-based payments, the group moved from an operating profit of £0.2m in FY19 to a £0.2m operating loss. Reported profit before tax benefited from £1.6m negative goodwill arising on the acquisition of SCL, partly offset by £0.3m acquisition expenses, resulting in a switch from a small £0.1m loss before tax in FY19 to £0.4m profit before tax in FY20. The group benefited from £0.5m enhanced research and development tax allowances.

Placings fund SCL acquisition, new Stonehouse site and working capital

Net cash totalled £11.3m at end FY20 (excluding £2.6m IFRS 16 lease liabilities), compared with net debt at end FY19 of £0.3m (excluding £0.7m lease liabilities). A placing in March at the time of the SCL acquisition raised £5.9m (gross) at 80p/share and a placing and open offer in December 2020 collectively raised £12.6m at 200p/share. Part of the funds raised in March were used to finance the SCL acquisition (£1.6m net of cash), with the surplus allocated for capacity expansion at Stevenage and working capital as IHT series production ramps up. Other cash outflows during FY20 included payments on IHT production equipment for the Tewkesbury site, primarily the laser drill, direct imaging tool and clean room infrastructure (£0.4m capex net of new leases) and investment in IHT development (£2.2m capitalised R&D). The balance sheet had £13.9m cash at the end of December 2020.

Outlook

Uncertainty continues in the short term

Management expects economic uncertainty in the UK and elsewhere to continue during most of FY21, depressing demand from new customers. In addition, supply chain shortages may lead to delays in fulfilling Advanced PCB orders for a major customer, although management expects to make up for that with other Advanced PCB business. Paradoxically, the supply chain shortages are encouraging existing customers to place larger orders than usual to ensure they have the circuits needed to cover a longer period of production, and SCL is recruiting additional staff to meet production demand. Revenues for the five months ended May 2021 totalled £3.1m (five months ended May 2020: £1.9m), £0.3m of which was attributable to the IHT division. The order book at the end of May 2021 totalled £4.9m, of which £2.6m is scheduled for 2021 delivery. This includes £0.5m for the UK EV OEM programme, £0.2m for IHT development in the nuclear fusion field, £0.1m for IHT development in the space sector and £2.0m for the Advanced PCB division.

EV OEM ramp-up delayed but total contract value increased

Trackwise has been working with its UK EV OEM customer on improvements to the products it will be producing in volume for it. As a result, management anticipates that the volume ramp-up for this programme will be delayed by a quarter and will now not commence until early FY22 rather than late FY21, removing c £5m in revenues from the FY21 delivery schedule. On the other hand, the EV OEM customer has 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.

Volume IHT production for medical sector presents upside to FY22 estimates

Trackwise is working with five 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 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 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 unmanned aerial mobility (UAM), two developers of business jets and two developers of high-altitude pseudo-satellites (HAPS). The GKN project is the most advanced. Management estimates that this could progress to production revenues within two to three years.

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. The company is in the process of installing an automated roll-to-roll IHT production line at the site with the intention of it being fully operational by end FY21. The site has capacity for the installation of a second line in the future. Around £9m of the funds raised in December were allocated for purchasing the site and associated equipment. Once operational, the Stonehouse site will be used for high-volume/low-mix IHT work and the Tewkesbury site (1,812m2) for low volume development projects.

Revisions to estimates

We revise our FY21 estimates to reflect the delay in volume ramp-up for deliveries to the UK EV OEM. We introduce FY22 estimates, which make the following assumptions:

IHT revenues: we model £13.0m revenues from deliveries to the UK EV OEM and £0.6m other IHT revenues, ie they exclude potential production revenues from the large US medical OEM.

Advanced PCB revenues: we assume that any supply chain constraints have eased by this time and that the economic uncertainty deterring new customers from placing orders has disappeared, resulting in 5% year-on-year growth.

R&D tax credit: we model a £0.3m tax credit.

Capital expenditure: we assume that the major investment programme at Stonehouse completes by end FY21, so investment in property, plant and equipment (excluding finance leases) reduces from £4.8m (FY21) to £0.6m (FY22).

Capitalised development: we assume that Trackwise continues to invest in IHT development, with capitalised development remaining at FY21 levels, ie £1.0m.

Exhibit 1: Revisions to estimates

£m

2020

2021e

2022e

Est.

Actual

Change

Old

New

Change

New

Revenues

6.1

6.1

-0.9%

14.3

9.0

-36.8%

22.1

EBITDA

0.7

0.8

10.0%

2.7

0.7

-74.4%

4.2

Normalised PBT

(0.3)

(0.4)

14.8%

1.3

(0.7)

N/A

1.9

Normalised basic EPS (p)

0.35

1.42

307.0%

4.86

(1.0)

N/A

6.38

Dividend per share (p)

0.00

0.00

0.0%

0.00

0.00

0.0%

0.00

Net debt/(cash)*

(11.2)

(8.8)

-21.7%

(0.7)

2.8

N/A

2.3

Source: Edison Investment Research. Note: *Including IFRS 16 leases.

Valuation

Peer multiples

Exhibit 2: Peer multiples

Name

Market cap ($m)

EV/Sales 1FY (x)

EV/Sales 2FY (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

P/E 1FY (x)

P/E 2FY (x)

CAGR*

EBITDA margin 1FY (%)

EBITDA margin 2FY (%)

AT & S

1,674

1.4

1.2

5.9

4.7

18.0

14.8

17.4%

23.7

24.6

CMK

249

0.5

0.5

6.8

5.4

21.9

11.9

7.6%

7.6

9.1

Compeq Manufacturing

1,801

0.8

0.7

4.2

3.8

9.8

8.5

7.5%

18.7

19.0

Ibiden

7,503

2.3

2.1

7.7

6.4

23.9

19.2

13.9%

29.3

32.1

KCE Electronics

2,537

5.8

5.1

24.0

19.9

39.8

31.9

17.6%

24.0

25.4

Meiko Electronics

777

1.1

1.0

9.1

8.2

14.0

12.1

7.6%

12.1

12.5

Tripod Technology

2,525

1.0

0.9

5.2

4.7

11.0

10.0

9.1%

18.6

19.2

TTM Technologies

1,541

0.9

0.8

6.9

6.3

11.5

9.8

4.4%

12.7

13.3

Unimicron Technology

6,959

2.2

1.9

11.2

8.5

24.0

17.8

12.4%

19.7

22.5

Zhen Ding Technology

3,633

0.8

0.7

4.2

3.7

10.6

9.1

11.5%

18.3

19.2

Mean

1.7

1.5

8.5

7.2

18.4

14.5

18.5

19.7

Trackwise Designs

81

5.2

2.1

66.9

11.2

(213.4)

32.1

90.9%

7.8

18.9

Source: Refinitiv, Edison Investment Research. Note: Prices at 28 June 2021. *CAGR is compound average growth in revenue between year 0 and year 2.

Although Trackwise’s share price fell by 16% on the day that the delay to the UK EV OEM programme was announced, overall the share price has doubled 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. However, based on our estimates, Trackwise is expected to grow revenues much more strongly than any of the sample between FY20 and FY22. Moreover, the IHT business has the potential to deliver growth that is faster than the average for our sample – 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.

Scenario analysis

In our September 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 in 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.

Exhibit 3: 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)

(5.9)

(14.3)

Gross Profit

1.1

1.7

3.1

7.9

EBITDA

 

 

0.5

0.8

0.7

4.2

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

28.4

28.4

EPS - normalised (p)

 

 

0.8

1.4

(1.0)

6.4

EPS - diluted normalised (p)

 

 

0.8

1.4

(0.9)

6.2

EPS - basic reported (p)

 

 

(0.3)

6.0

(2.5)

6.6

Dividend (p)

0.0

0.0

0.0

0.0

Revenue growth (%)

(16.2)

108.8

48.5

145.5

Gross Margin (%)

37.9

28.3

34.6

35.5

EBITDA Margin (%)

17.8

12.7

7.8

18.9

Normalised Operating Margin

6.9

N/A

N/A

10.8

BALANCE SHEET

Fixed Assets

 

 

6.8

14.7

24.7

24.5

Intangible Assets

4.3

6.5

7.3

8.0

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

12.8

16.9

Stocks

0.6

2.0

2.2

3.6

Debtors

1.7

1.8

2.0

4.2

Cash & cash equivalents

0.6

13.9

7.7

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

0.7

4.2

Working capital

0.1

(0.6)

(1.2)

(1.9)

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

(0.2)

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

(6.2)

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)

(5.6)

Source: Edison Investment Research


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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.

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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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