Journeo Share Discussion Threads

[74tom] 02/4/2024 11:16

Eric, I must say your post 862 is quite notable, to read & respond to my comments with a 397 word post in 4 minutes is superhuman. Are you using a GPT program by any chance?

You've responded with the standard bull case and of course things may play out like that. However, I feel that the market has got significantly ahead of itself based on the detail provided in last weeks report.

Digging further into the segmental reporting, operating profit for fleet & passenger systems in FY22 was £1.43m, in FY23 this more than halved to £698k. This meant that organic JNEO operating margin dropped from 6.77% in FY22 to 2.75% in FY23.

The trend is worse if you look at the half year reporting for fleet & passenger systems;

H122 revenue £8.87m, operating profit £449k, operating margin 5.1%
H222 revenue £12.24m, operating profit £981k, operating margin 8%
H123 revenue £12.5m, operating profit £513k, operating margin 4.1%
H223 revenue £12.8m, operating profit £185k, operating margin 1.4%

Passenger systems actually reported an operating loss of £45k in H223, vs a £410k H2 profit the year before...

Infotec saved the day contributing operating profit of £3.697m, and MultiQ £153k.

Cavendish forecasts in March 23 were for PAT of £2.8m, their reported PAT figure was £2.97m, so they beat this forecast by just £170k, with ~£130k of this attributable to MultiQ, so overall organic JNEO + Infotec were in line, and as the above info shows, organic JNEO was some £700k lower than prior year, despite the 20% top line growth.

Shares pumped from August onwards due to company repeatedly reiterating that they were materially ahead of forecasts. Whilst this is obviously true with regard to revenue, it's clear that organic operating profit was actually substantially lower than the prior year, and I can't imagine the March 2023 forecasts planned for that?!

It's also extremely relevant given the company likes ramping it's 'pipeline' of £55-60m, if this is work that will earn them a 2% operating margin then it's hardly exciting is it? And it's not as if public transport bodies are awash with cash.

Likewise with the recent purchase orders, they enjoy reporting the gross figure but £5.75m of orders at the H2 operating margin of 1.4% = £80k of operating profit...

Surely operating margins are everything if you are expecting expanding PE ratios & growing EPS to drive shares higher?

[melton john] 02/4/2024 11:13

Bomber, I agree about the integrity and conservatism of the management. It comes with the C.Eng qualification of Singleton. Equivalent to Masters Degree or PhD in engineering. You train to under rate and work within safety margins so under promise and over deliver is second nature imho, that's the way he comes across to me.

[pireric] 29/3/2024 20:01

Bomber - yes they indicated on the IMC that they are processing the Infotec products through the needed approvals for a raft of European countries at the moment (German, France, Sweden, Denmark, Iceland, Norway, Italy). On the acquisitions pipeline side, I think they said 2 were in Europe. In acquisitions in general, I think as much as anything, they're looking to acquire distribution/existing customer relationships, as generally speaking they have the (increasingly integrated) technologies to sell already

Eric

[bomber13] 29/3/2024 19:04

Many thanks as well , I am a relatively new shareholder , but I do like what I see and hear so far . I totally agree with you about the integrity of the management , its lack of arrogance , its conservatism , its ability to bolt on accretive acquisitions , and its underpromise overdeliver mentality . A real rarity for AIM !

I wonder when we are going to hear a lot more about overseas potential ? I don't just mean more from the New York subway contract or North America in general , but also European ambitions . Tucked away in the 2023 results , Scandinavia was shown to have contributed £1.5m of revenue , up from just £458/- in 2022 , with admittedly some of that growth reflecting 3 months worth of the MultiQ acquisition . 2024 should therefore be much better still .

Other EU countries did only £8000 of revenue in 2023 , down from £38/- , so the broader EU including France , Germany and Italy still represents a fantastic blank canvas for Journeo . Important therefore that certification of Infotec's products in Europe comes through soon , as inferred in the presentation . Perhaps one or both of the two overseas companies being tracked by Journeo as potential acquisitions are European based ?

[qs99] 29/3/2024 15:38

Indeed, thanks both really interesting

[saucepan] 29/3/2024 14:43

Very good discussion of the bull and bear case. Thanks, both.

[pireric] 29/3/2024 11:32

Again it was in the presentation deck. >£7.5m of annual recurring revenue this year

I think there will always be a bit of lumpiness in the order book, and the Infotec NY Subway deal would absolutely be a reason for that. So yes, it's possible, but (pardon the pun), it's just a dynamic rather than something that 'derails' the investment case IMO. You're right to point out some lumpiness in this business, but that's the reason why Cavendish forecasts this year are not higher at this stage and why some of the recent purchase orders have only supported management expectations for the year and not increased them.

If and when any of the remaining 1,500 train opportunities for NYC do come through, that would be materially accretive to forecasts, I think, as it would be a multiple of the current Infotec contract ($18m). That will be partly reliant on what the MTA are doing around train rollout and what Outfront are doing (partly tied to NYC subway footfall, which does seem to be recovering now). Outfront are also seeming a bit more proactive around some of their own subway plans (e.g. rolling out programmatic ads). In some ways, there is an expand story with the MTA a little similar to what you're seeing with digital bus wing mirrors in Journeo's core. But more option value on the upside at this stage

But also bear in mind since the end of 2023, we have likely had at least £5.75m of value added to the order book from the purchase orders and framework agreements signed YTD

I'm very comfortable with the integrity of the management team and their conservative approach to setting forecasts (to generally underpromise and overdeliver), as well as the recent director purchases. And then that other acquisitions will be accretive to the existing forecast base, which is helpful. The management team indicated they are tracking ~10 businesses (2 outside the UK, rest in the UK). Would look to do at least 1/2 this calendar year.

Eric

[74tom] 29/3/2024 11:26

"On the IMC they did disclose the total sales pipeline had grown to £60m, so it was reported and it is at a new record, just not in writing."

Hmm. I mean why not put it in the report? Is it possibly because the order book has declined and so they can't mention one without the other?

I.e. "We entered H2 2023 with a £27m order book and a £55m sales pipeline.”

They was also zero disclosure on recurring revenue, something that I remember being promised on the September IMC?

[pireric] 29/3/2024 11:12

Just a few other points

- On the IMC they did disclose the total sales pipeline had grown to >£60m in writing, so it was reported and it is at a new record, just not in the RNS.

- Reported diluted basic EPS of 17.96p. But on an adjusted basis it was 19.8p. And the forward forecast is 22.1p

- I don't think anyone expects the rate of historical growth to continue. The forward Cavendish forecasts to underpin 2024 EPS of 22.1p is 4.1% revenue growth y/y. That's as some of the different factors you've talked about play out in this year's mix. But then further acquisitions will probably come in on top of those forecasts. You're right that Infotec's order book is probably not at record levels - that would make complete sense. Hence you need to pencil in the Multi-Q additional annualisation effect and the core businesses improving this year. Which both seem near dead-certs based on contract activity

What's the right valuation for a business like this? Id still argue close to 10x P/E adjusted for cash is pretty low, particularly as the business continues to get stronger (you can see in contract wins), and given the longer-term story here is one probably of 5%-7+ organic revenue growth, margin expansion (targeting >10%). and favourable working capital dynamics. I wouldn't really bat an eyelid if we did not adjust for the cash balance and you put 15x on the 22.1p forward P/E to get to 330p.

Eric

[74tom] 29/3/2024 11:08

Finally, I note that order book disclosures are inconsistent, i.e. in the FY23 final results they disclosed that;

“Independently of the acquisition of Infotec, our Fleet Systems and Passenger Infrastructure businesses have order books of unprecedented strength and an increasing pipeline of opportunities.”;

In the September half year report they said; “Record order book as at 30 June 2023 of £27m” & “We entered H2 2023 with a £27m order book and a £55m sales pipeline.”

This week it was just "We entered 2024 with a strong order book, a growing sales opportunity pipeline,” & "The Passenger Transport Infrastructure business enters 2024 with its strongest ever order book and a clear strategy to improve operating margins."

In my view this is highly selective reporting and a red flag. Fleet systems & infotec presumably don't have record order books or we would have been informed of this fact... And the overall order book can't be at a record because again surely this would have been stated...

I also don't like the fact they they stated a specific figure in the half year report but didn't do so in the finals.

On valuation terms they reported diluted basic EPS of 17.96p, so sit at a P/E of slightly over 15x. It looks very fairly valued to me, as I think they'll struggle to get close to the growth reported this year, which was almost entirely driven by a well timed Infotec acquisition which recognised revenue from a rather exceptional contract win.

All in my opinion of course, but I just don't see obvious upside when looking at things critically.

[pireric] 29/3/2024 11:01

I think those are fair comments 74tom, but it's quite backwards looking. The main question investors have to ask is whether the forward forecasts are realistic and achievable.

The answer there for me is a Yes, with a material gross margin improvement to come in 2024 as product mix improves. They also talked on the IMC call about supply chain pressures having dissipated this year so far unlike last year. And frankly, if they hit their 2024 forecasts (which to me seems likely), then we are still looking at 22p of EPS< and £10m of net cash balance, whichever way you dice it. You need to factor in Multi-Q which will help with the achievability of overall 2024 revenue aspirations. The upside versus consensus will be if Infotec win further deals around the New York subway; I don't believe that's being baked into existing forecasts as that is difficult to predict, and there are no guarantees Journeo's partners will bid too. But the remaining subway opportunity is much larger than what has been delivered so far (the contract was c. 500 trains vs. a remaining 1,500 to go after, and the existing deliveries are still running through H1 2024).

The mix will shift this year - as on the IMC, more Passenger /Fleet systems, for example. More SaaS/Software.

The next question is around whether the business is sufficiently investing for growth. Everything I've seen, inorganic and organically suggests they are. And so wind forward a year's time, some of these reasonable pushbacks you are pointing out will be reversed. And if that happens, I suspect the P/E multiple will be materially higher than ~10x cash adjusted. Hence why we are also seeing the CFO buy and why the management team are sounding so confident, particularly given what they've probably booked YTD and are seeing in order backlog/purchase order trends.

Then there will almost certainly be earnings upside this year as and when they deliver on 1/2 acquisitions, not least because Cavendish are forecasting nil net interest income for this year.

I actually understand your points - they are good ones to be aware of. But the bigger picture here is one of material improvement in the quality of the business, a strong management team, and a valuation that is not demanding - if we were on 20x cash adjusted P/E I think I might draw different conclusions.

Eric

[74tom] 29/3/2024 10:59

Then we move into Infotec. Their historic financials were disclosed in the Dec 2022 acquisition; from 2018-2021 revenue declined each year from £7.26m to £5.53m, with PBT averaging ~£800k.

However, we know it then spiked due to a large contract win;

“Infotec is expecting to grow its revenues from £5.8 million for the year ended 30 September 2021 to approximately £12.0 million for the year ended 30 September 2022. This high revenue growth has been supported by Infotec's major contract win with a value of US$18 million with Outfront Media ("OFM"), to supply displays for 535 new Kawasaki R211 subway trains for New York City.”

This year they reported £19.6m revenue, in the major customer segment they disclose that; “In the year, one customer within each of the Fleet Systems and Infotec segments accounted for over 10% of Group revenue at 11% and 17% respectively”, 17% of group revenue = £7.82m, which tallies up nicely with the OFM contract, so 40% of Infotec’s revenues were almost certainly derived from this deal, meaning there is surely very little left to recognise in FY24 & the very real potential for a decline in financial metrics?

[74tom] 29/3/2024 10:57

I for one am not buying the hype here, especially when it's being fanned by the likes of Simon Thompson.

Digging into the results provides some interesting information.

Organic gross profit growth was just 2%, while inorganic was 84%, you can guess which one they highlighted at the top of the report ;)

However, there is a significant split with H123 organic gross profit growth was 18% whilst in H2 there was a 10% YoY decline, from £4.5m in H222 to £4.05m in H223.

Reasoning was varied;

"Fleet sales increased by 31% to £16.3m (2022: £12.5m) as bus operators continued to increase investment, backed by Government stimuli. Gross profit increased to £3.9m (2022: £3.7m) with margins decreasing to 24% (2022: 30%) as significant levels of hardware with a future SaaS benefit were installed and supply chain and other cost increases impacted across the majority of the financial year.

Passenger sales increased by 5% to £9.0m (2022: £8.6m). Margins fell slightly to 44% (2022: 47%), as a result of cost pressures during the year."

So overall, if the pre Infotec JNEO business was trading separately, the market would have reacted poorly to flat year on year performance, with a significant H2 decline.

[eeza] 28/3/2024 20:28

Yes, exactly.
320000/20 (4 weeks) = 80000 per week = 16000 per day.

Surely out, or very nearly.

[pireric] 28/3/2024 20:10

If you do the maths for their portfolio/NAV RNS at the start of March

NAV £30.44m
JNEO 2.73% of the NAV
JNEO share price the day prior (end of Feb) 260p
Implies about 320k shares held at the end of February. You'd think that is materially lower now

Eric

[jones1961] 28/3/2024 09:54

I may well be wrong, but I don't believe that DSM can have many left after the recent volume. At end Jan they had 415k shares left. Am wondering if they looking to sell all by March 31st, if so, could be that they want to be out by tomorrow. I think DSM stake is the only thing that is holding the share back.

[nchanning] 28/3/2024 09:53

The medium target of 100m revenues and double digit operating margin looks very achievable . 20% organic growth last year , big cash pile for acquisitions, massive increase in spending in the sector . 10-15% operating margin feels about right for this business , not the highest quality but some IP and software . Having gone from 13.6m revenue and negligible PBT in 2020 to 100m revenue and 10m PBT in say 2027 I would certainly expect a 200m + market cap as more institutions deem it to have reached sufficient size to make it investable .

[tightfist] 28/3/2024 07:30

The importance of scale..... we need to remember JNEO only has a MC of £46m and a revenue forecast of £48m for this FY

[livewireplus] 28/3/2024 07:15

Indeed .. with Swansea Council .... with possibly more in Wales to come as the Transport for Wales country-wide Welsh Bus Data Content Management System (WBDCMS) will be launched later this year and authority systems migrated.

[tightfist] 28/3/2024 07:15

Yes, a useful summary of Journeo integrated initiatives in Wales - IMHO more to come.....

[eeza] 28/3/2024 07:06

RNS - £1.5m order

[eeza] 27/3/2024 13:51

There's almost more delayed (hidden) trades than those put straight through.

[vfast] 27/3/2024 12:49

Great presentation and very positive, aim medium term revenues of £100m.

A lot of good points and can expect another acquisition.

[nchanning] 27/3/2024 11:33

Directors for the most part act like value investors , they tend to buy when the share price falls and sell when it rises . The most golden signal of all is when a director buys near the highs . It goes against their natural instincts , extremely bullish . CFO probably not that wealthy either , and with stock options in the bag still willing to dip into his pocket

[pireric] 27/3/2024 11:12

Can't really blame him. It's on 12x earnings with nearly 20% of the market cap in net cash. Easy hold and come back later here.

Eric