Small-cap vehicle tracking specialist Quartix Holdings (LSE: QTX) felt the full wrath of investors this morning with its shares falling 10% following the release of the company’s latest set of interim results.
After reading and re-reading today’s numbers, I can’t help but think this reaction is overdone. Here’s why.
Flat profits
Over the six months to the end of June, revenue came in at £11.5m — a small reduction on that achieved in the same period in 2016. Pre-tax profits were also pretty much flat at £3.2m, compared to £3.3m in H1 2016. While some holders would have hoped for better, that’s hardly the stuff of nightmares.
On an operational level, it reported “excellent progress” in its main fleet business with revenue rising 15% to £8.3m and vehicle subscriptions increasing to 10% to just under 97,000. The number of fleet installations also rose by a very encouraging 45% to over 14,000 with recurring revenue rising 16% to £7.6m. Attrition rates were significantly below the industry average.
Growth in customer numbers was seen in all markets with rates of 9% and 12% achieved in the UK & Ireland and France respectively. While still a relatively small part of the business, the number of US clients signing up increased 20% over the six month period.
Now for the less good news.
As a result of a planned move away from its lower-margin insurance business, revenue from this part of Quartix fell 27% to £3.2m with the number of installations falling 35% to just under 24,000. According to Managing Director Andy Walters however, this move will lead to a “more acceptable balance in margin” between the two parts of the business. He went on to reflect that, notwithstanding the unpredictable nature of its insurance business, the company would use any additional income generated to invest in its fleet operations.
Falling knife?
Today’s substantial fall in the share price needs to be put into perspective. Since coming to market towards the end of 2014, shares in the Cambridge-based company have still climbed over 140% even after taking this negative reaction into account. That’s a pretty healthy capital return in anyone’s book.
Indeed, Quartix seems to have become the victim of its own success in the sense that investor expectations appear to be ahead of reality. Any announcement from a growth-focused company that states it is on track to meet profit expectations rather than beat them — such as that announced today — was always likely to be punished by the market.
Assuming investors can look beyond the short term, however, I still reckon Quartix warrants attention. A quick scan under its bonnet shows a company particularly adept at deploying cash with returns on capital almost tripling between 2011 and 2016. The relatively low amount of capital expenditure also means that levels of free cashflow — while declining by 16% to £2.6 over the reporting period — remain decent. Income investors may also be attracted by Quartix’s intention to distribute the excess of cash balances over £2m as a supplementary dividend.
To be h0nest, I think today may have presented prospective investors with a great opportunity to climb on board, even if — thanks to their sustained rise — Quartix’s shares are unlikely to be cheap on conventional measures (trading at a vertigo-inducing 33 times forward earnings before this morning’s numbers were revealed).
Strange as it may sound, today’s drop may actually be a blessing in disguise.
