Tribute to a 'ten-bagger', always on right track

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Last week, I was privileged to attend the leaving party for John McArthur, one of the founders and long-standing CEO of Leeds-based transport technology business Tracsis.

Under McArthur’s tenure, Tracsis has been a truly remarkable investment and holds that most elusive of accolades: a ten- bagger, City speak for a share price that has risen in value by at least ten times.

Researching this article gave me reason to look back at our initiation note on Tracsis in 2011: back then, revenue was under £3m and the market capitalisation just £12m. Last year it turned over just under £40m and is currently valued at £195m. The fact all this has happened on our doorstep (Tracsis was originally a Leeds University spin out) makes it all the more reason to celebrate its success.

There are a number of things that strike me about the Tracsis story. All are worthy of mention, not least insofar as they may offer pointers as to the attributes of future ten-baggers. First and foremost, Tracsis operates in a market in structural growth mode. Rail travel is growing with passenger numbers in the UK more or less doubling since 2002. As a result, Tracsis’ scheduling and rostering software (which helps to make railways run more efficiently) and condition monitoring hardware (which identifies possible issues with rail infrastructure before a costly failure) have been in demand.

The fact it worked with many - but not all - of the train operating companies (TOCs) gave it growth opportunities over and above this base level: not only were there new customers to sign (the business now acts for virtually all the TOCs in the UK), investment in development meant there was also a suite of new products to upsell. It’s all very well operating in a growing market, but the products the business sells must remain relevant. This is the key to the all-important pricing power, ie, the ability to push through price increases without the customer walking.

Another important attribute of Tracsis’ business model has been its consistent cash generation – reported profits translate very well into hard cash rather than being absorbed into capital

expenditure or working capital. This latter point has proved to be the raw material which has arguably supercharged Tracsis’ overall return: a well-executed M&A strategy. Since joining AIM in 2007, the business has made a total of 12 acquisitions, very roughly one a year. Even more remarkably, all the acquisitions so far have been made out of internal cash without tapping shareholders. What a refreshing change to empire builders dependent on a stream of new equity or debt which can act to reduce returns as well as lining the pockets of brokers.

Although the businesses Tracsis has acquired have been quite diverse (including even an events parking operator), they have all been strong in their sectors and often with owner managers keen to preserve what they’ve created as well as realising an exit. A prudent approach to pricing (a function no doubt of a Scottish CEO and an FD from Yorkshire) with a deferred element of consideration to de-risk the exercise has helped to enhance the return: after all, buying a business for 6x EBIT stacks up well when your own paper is trading on two to three times that level.

Businesses like Tracsis are rare but not unique. Those of us around long enough may recall Harrogate-based Broker Network, an insurance business with an active M&A strategy for buying up insurance brokers. That too proved a good ride for investors until it was sold to Towergate in 2007 for £95m, a substantial uplift on its £11m IPO value in 2004.

At the end of the evening, I was introduced to Chris Barnes, the incoming CEO. Whilst he inherits a business in fine fettle, I couldn’t help but feel it will be a hard act to follow.