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Research: TMT
Trackwise has announced that it expects FY20 revenues to be c £6.1m, which is lower than our estimate, reflecting disruptions to supply chains caused by tighter coronavirus restrictions and uncertainty about the Brexit deal. However, careful cost control means that management expects adjusted operating losses to be c £0.2m, in line with our estimates. We have updated our FY20 forecasts but leave our FY21 estimates, which are underpinned by an order worth up to £38m over three years from a UK electric vehicle (EV) OEM, unchanged.
Written by
Trackwise Designs |
Year-end slowdown in sales |
Post-close trading update |
Tech hardware & equipment |
25 January 2021 |
Share price performance
Business description
Next events
Analyst
Trackwise Designs is a research client of Edison Investment Research Limited |
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Trackwise has announced that it expects FY20 revenues to be c £6.1m, which is lower than our estimate, reflecting disruptions to supply chains caused by tighter coronavirus restrictions and uncertainty about the Brexit deal. However, careful cost control means that management expects adjusted operating losses to be c £0.2m, in line with our estimates. We have updated our FY20 forecasts but leave our FY21 estimates, which are underpinned by an order worth up to £38m over three years from a UK electric vehicle (EV) OEM, unchanged.
Year end |
Revenue (£m) |
EBITDA |
PBT* |
EPS |
DPS |
P/E |
12/18 |
3.5 |
0.6 |
0.3 |
2.1 |
0.0 |
N/A |
12/19 |
2.9 |
0.6 |
0.2 |
1.1 |
0.0 |
N/A |
12/20e |
6.1 |
0.7 |
(0.3) |
0.35 |
0.0 |
N/A |
12/21e |
14.3 |
2.7 |
1.3 |
4.86 |
0.0 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Double hit of Brexit uncertainty and coronavirus
Towards the year-end customers of both the Improved Harness Technology (IHT) and Advanced PCB (printed circuit board) divisions delayed purchases. Stricter coronavirus restrictions in the UK and overseas and concerns about a potential no-deal Brexit affected logistics chains and thus availability of components. Management expects trading activity to normalise later in FY21.
Underlying growth drivers unaffected
The main growth drivers are broadly unaffected by either the pandemic or Brexit. IHT revenues for FY20 and FY21 are supported by the major EV contract. Having delivered samples to its lead electro-surgical catheter customer, a large US medical OEM, management anticipates further orders in 2021 and is targeting early 2022 for production revenues. While the commercial aerospace industry has been badly affected by the pandemic, investment in new technology such as IHT, which cuts both carbon emissions and operating costs, continues. Moreover, given the time to test new products in the aviation industry, management does not expect any of the 30+ programmes it is working on in the sector to move to volume production until 2023. The number of IHT customers and qualified opportunities (ie where the two parties have signed a non-disclosure agreement and there is ongoing collaboration) has risen from 82 in June to 87 at the year end.
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 note. This explores how the three key segments in which Trackwise has developed prototype IHT products for customers (EVs, medical devices and aerospace) each have the potential to generate revenues of at least £100m at even relatively modest levels of market penetration.
Changes to estimates
Exhibit 1: Revisions to estimates
£m |
2020e |
2021e |
||||
Old |
New |
Change |
Old |
New |
Change |
|
Revenues |
7.1 |
6.1 |
-14.0% |
14.3 |
14.3 |
0.0% |
EBITDA |
0.7 |
0.7 |
0.0% |
2.7 |
2.7 |
0.0% |
Normalised PBT |
(0.3) |
(0.3) |
0.0% |
1.3 |
1.3 |
0.0% |
Normalised basic EPS (p) |
0.35 |
0.35 |
0.0% |
4.86 |
4.86 |
0.0% |
Dividend per share (p) |
0.00 |
0.00 |
0.0! |
0.00 |
0.00 |
0.0% |
Net debt/(cash) |
(11.6) |
(11.2) |
-3.2% |
(1.0) |
(0.7) |
-32.8% |
Source: Trackwise, Edison Investment Research
We leave our estimates broadly unchanged. The modifications are:
■
lower FY20 revenues,
■
lower FY20 operating costs, and
■
higher levels of capitalised R&D in FY20.
We leave our FY21 estimates unchanged for the time being, while noting potential for both underperformance and outperformance. On the one hand, we see potential for a recession as the government support for businesses and households during the coronavirus pandemic is withdrawn. This may adversely affect demand for products manufactured by Trackwise’s Advanced PCB customers. In addition, the call-off of parts under the EV programme may slip so that some sales currently scheduled for FY21 are actually delivered during FY22. On the other hand, given the growing IHT pipeline, we see opportunities to win additional new business for delivery during FY21.
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 |
1,330.8 |
1.3 |
1.1 |
5.8 |
4.7 |
23.4 |
14.2 |
15.4% |
21.9 |
23.7 |
CMK |
258.9 |
0.5 |
0.5 |
12.6 |
5.6 |
(12.0) |
25.7 |
-3.5% |
4.3 |
8.8 |
Compeq Manufacturing |
1,819.8 |
0.9 |
0.8 |
4.8 |
4.1 |
10.5 |
8.9 |
9.1% |
18.5 |
19.8 |
Ibiden |
6,912.4 |
2.3 |
2.0 |
9.8 |
7.0 |
32.3 |
24.6 |
10.8% |
23.4 |
29.0 |
KCE Electronics |
1,963.4 |
5.2 |
4.6 |
26.7 |
20.1 |
52.3 |
31.6 |
3.9% |
19.5 |
22.7 |
Meiko Electronics |
498.9 |
0.9 |
0.9 |
8.5 |
7.7 |
18.7 |
12.6 |
5.3% |
11.0 |
11.0 |
Tripod Technology |
2,452.8 |
1.0 |
1.0 |
5.8 |
5.1 |
11.9 |
11.0 |
3.4% |
18.0 |
19.1 |
TTM Technologies |
1,514.4 |
1.0 |
1.0 |
7.4 |
7.4 |
14.3 |
11.4 |
-10.6% |
13.2 |
13.7 |
Unimicron Technology |
5,144.0 |
1.9 |
1.7 |
12.1 |
8.7 |
34.3 |
23.9 |
6.9% |
15.4 |
20.0 |
Zhen Ding Technology |
3,894.5 |
0.9 |
0.8 |
5.0 |
4.0 |
12.4 |
9.9 |
9.9% |
18.0 |
19.7 |
Mean |
1.6 |
1.4 |
9.9 |
7.4 |
23.3 |
17.4 |
16.3 |
18.8 |
||
Trackwise Designs |
116.7 |
14.1 |
6.0 |
122.7 |
31.4 |
856.1 |
61.7 |
121.5% |
11.5 |
19.3 |
Source: Refinitiv, Edison Investment Research. Note: Prices at 21 January 2021. Grey shading indicates exclusion from mean. *CAGR is compound average growth in revenue between year 0 and year 2.
Although Trackwise’s share price fell by 7% on the day of the post-close trading update, overall the share price has doubled since the announcement of the series production order for the EV manufacturer in September. 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 FY19 and FY21. 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 several years beyond that, so the peer multiple-based approach fails to recognise the potential of the IHT activity in the longer term. Although we do not present detailed FY22 estimates, we provisionally estimate that expansion could support FY22 revenues of at least £24m. 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 the three key segments in which Trackwise has developed prototype IHT products for customers (EV, medical devices and aerospace) each have 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.
Exhibit 3: Financial summary
£m |
2018 |
2019 |
2020e |
2021e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
3.5 |
2.9 |
6.1 |
14.3 |
Cost of Sales |
(2.4) |
(1.8) |
(3.6) |
(8.9) |
||
Gross Profit |
1.1 |
1.1 |
2.5 |
5.4 |
||
EBITDA |
|
|
0.6 |
0.6 |
0.7 |
2.7 |
Normalised operating profit |
|
|
0.3 |
0.3 |
(0.2) |
1.5 |
Amortisation of acquired intangibles |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(0.0) |
(0.1) |
1.3 |
0.0 |
||
Share-based payments |
(0.2) |
(0.2) |
(0.4) |
(0.3) |
||
Reported operating profit |
0.1 |
(0.1) |
0.7 |
1.2 |
||
Net Interest |
(0.1) |
(0.1) |
(0.1) |
(0.2) |
||
Joint ventures & associates (post tax) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
0.3 |
0.2 |
(0.3) |
1.3 |
Profit Before Tax (reported) |
|
|
0.1 |
(0.1) |
0.6 |
1.0 |
Reported tax |
0.0 |
0.1 |
0.4 |
0.3 |
||
Profit After Tax (norm) |
0.3 |
0.2 |
0.1 |
1.4 |
||
Profit After Tax (reported) |
0.1 |
(0.0) |
1.0 |
1.3 |
||
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Discontinued operations |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net income (normalised) |
0.3 |
0.2 |
0.1 |
1.4 |
||
Net income (reported) |
0.1 |
(0.0) |
1.0 |
1.3 |
||
Basic average number of shares outstanding (m) |
11.8 |
14.7 |
20.8 |
28.4 |
||
EPS - normalised (p) |
|
|
2.14 |
1.13 |
0.35 |
4.86 |
EPS - diluted normalised (p) |
|
|
2.05 |
1.06 |
0.34 |
4.71 |
EPS - basic reported (p) |
|
|
0.63 |
(0.33) |
4.69 |
4.70 |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
N/A |
(16.2) |
110.6 |
132.9 |
||
Gross Margin (%) |
30.3 |
37.9 |
41.4 |
37.7 |
||
EBITDA Margin (%) |
17.8 |
19.7 |
11.5 |
19.3 |
||
Normalised Operating Margin |
9.4 |
8.9 |
-3.9 |
10.8 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
3.9 |
6.8 |
11.7 |
21.5 |
Intangible Assets |
2.6 |
4.3 |
6.3 |
6.9 |
||
Tangible Assets |
1.3 |
2.5 |
5.4 |
14.6 |
||
Investments & other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Assets |
|
|
4.2 |
3.1 |
17.6 |
15.0 |
Stocks |
0.4 |
0.6 |
2.3 |
3.5 |
||
Debtors |
0.8 |
1.7 |
2.2 |
3.5 |
||
Cash & cash equivalents |
2.8 |
0.6 |
12.8 |
7.7 |
||
Other |
0.2 |
0.3 |
0.3 |
0.3 |
||
Current Liabilities |
|
|
(1.0) |
(1.4) |
(1.9) |
(2.3) |
Creditors |
(0.8) |
(1.0) |
(1.6) |
(2.0) |
||
Tax and social security |
0.0 |
0.0 |
0.0 |
0.0 |
||
Short term borrowings |
(0.2) |
(0.3) |
(0.3) |
(0.3) |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(1.2) |
(2.5) |
(2.5) |
(7.9) |
Long term borrowings |
(0.4) |
(1.3) |
(1.3) |
(6.7) |
||
Other long-term liabilities |
(0.8) |
(1.3) |
(1.3) |
(1.3) |
||
Net Assets |
|
|
5.9 |
6.0 |
24.9 |
26.3 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
5.9 |
6.0 |
24.9 |
26.3 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
0.6 |
0.6 |
0.7 |
2.7 |
||
Working capital |
(0.7) |
0.1 |
(1.7) |
(2.2) |
||
Exceptional & other |
(0.0) |
0.0 |
(0.2) |
0.0 |
||
Tax |
0.0 |
0.0 |
0.4 |
0.3 |
||
Net operating cash flow |
|
|
(0.1) |
0.7 |
(0.8) |
0.9 |
Capex |
(1.3) |
(2.7) |
(3.0) |
(5.6) |
||
Acquisitions/disposals |
0.0 |
0.0 |
(1.3) |
(0.2) |
||
Net interest |
(0.1) |
(0.1) |
(0.1) |
(0.2) |
||
Equity financing |
4.4 |
0.0 |
17.5 |
0.0 |
||
Dividends |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.1 |
0.2 |
0.0 |
0.0 |
||
Net Cash Flow |
3.2 |
(1.9) |
12.3 |
(5.2) |
||
Opening net debt/(cash) |
|
|
0.9 |
(2.3) |
1.0 |
(11.2) |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
0.0 |
(1.4) |
0.0 |
(5.4) |
||
Closing net debt/(cash) |
|
|
(2.3) |
1.0 |
(11.2) |
(0.7) |
Source: Company data, Edison Investment Research
|
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