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Gateley (Holdings) Plc (GTLY:LON)Xeros Technology Group Plc (XSG:LON)

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Gateley (Holdings) Plc

In an encouraging H1 update, Gateley has detailed that the Group’s activity levels and revenue generation continue to follow an improving trend with monthly activity during September and October being in excess of prior year. Sales in H1 2021E are expected to be not less than £50.0m (-3.5% on H1 2020) but adj. PBT is expected to be not less than £7.0m, up from £6.6m as cost-reduction initiatives benefited. Net cash was £9.6m at October 2020. We have reinstated forecasts, assuming H2 sees some increase in costs as salaries normalise and a bonus is accrued before more normal growth rates resume. Similarly, we assume dividends resume with a final in FY 2021E. We reiterate our view that Gateley’s proven model provides good growth prospects, supported by the addition of high-quality staff and acquisitions, strengthening the range of services offered.

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Tracsis plc

After a challenging 2H21 for the events and traffic data business, Tracsis has delivered FY results to July in line with the reassuring August trading update. With £48m (FY19: £49.2m) revenue, the group has quantified an estimated £10m set back to COVID-affected activities within the Traffic & Data Services (T&DS) Division, implying underlying outperformance compared with expectations for the higher-margin Rail Technology & Services (RT&S) Division. Forecasts describe prospects: continuing growth in FY21 and FY22 for RT&S, with two major contracts identified in latter stage of negotiation; and a still hampered FY21 for events and traffic surveys within T&DS – but forecasts for FY22 show a return to an ex-COVID environment, regaining the original growth path. With £17.9m of cash (no debt) and delivering multiple fundamental elements of the UK rail ecosystem, Tracsis has weathered the storm better than expected, with organic and acquired growth prospects as strong as ever. Target 900p reiterated.

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EOG SAV SHOE PPC DX/ TRCS ARB

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Argo Blockchain Plc

We initiate coverage of Argo Blockchain with a 17p target price and conservative forecasts. Argo operates a highly efficient cryptocurrency mining platform in Canada and the US, where it uses c16k specialised computers/machines to mine the cryptocurrencies Bitcoin (c90% of revenue) and Zcash. It differentiates because of its access to abundant, low cost power in these locations, and the proprietary technology that its team has created to optimise its machines’ operations. Argo has already achieved a cash payback of 1.3x on the machine investment it made in 2019, and we expect that Argo’s platform will deliver strong growth in the rapidly expanding cryptocurrency market, where the price of Bitcoin has increased to $19,000 from $9,000 in May 2020. Using conservative assumptions for mining rewards, and a spot Bitcoin price, we introduce forecasts for organic revenue growth of +34% to £25.3m, EBITDA growth to £11.1m from £5.6m, adjusted EPS of 0.7p, and EFCF of £7m. We also highlight in our 95p upside case that Argo’s platform is strongly geared to the interaction between Bitcoin’s price and the difficulty of mining Bitcoin, and in our downside case we highlight that under highly adverse assumptions Argo would still continue to generate EFCF, and deliver FY23 net cash of £11m or 4p per share. This attractive skew of share price outcomes demonstrates that Argo looks undervalued on 18x FY21 P/E, 9x FY21 EV/EBIT, and 17% FY21 EFCF yield, with peers on 26-40x P/E, EV/EBIT of 21-28x, and EFCF yields of 2-3%. We watch for changes in Bitcoin’s price and mining difficulty, Argo demonstrating operational efficiency at its results, and the potential acquisition of its Canadian datacentres.

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DX (Group) Plc

Trading to date in FY 2021 has been positive, with no sign of an adverse impact from the second national UK lockdown. Net new business across both divisions is described by management as encouraging and the new business pipeline remains very healthy. With volumes better than expected and margins improving DX is on track to perform materially better than market expectations and we have, consequently, upgraded FY 2021 EPS by 29% and FY 2022 by 15%, driven by stronger assumptions in DX Freight. We have also raised our FCF-based target price from 29p to 33p and reiterate our view that the group is in a strong position to rebuild profitability by winning new business and improving efficiency, productivity and margins.

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