Pennant International Group plc (LON:PEN) Chief Executive Officer Phil Walker caught up with DirectorsTalk discuss the acquisition of Track Access Productions, what is brings to the company and its financial impact.
Q1: You’ve recently made a rail acquisition announcement, what can you tell us about Track Access Productions?
A1: Track Access Productions, or TAP as I like to call it for ease, is an acquisition that is well aligned to our group’s objectives, and which is primarily to increase recurring revenue and our software and services based revenues.
TAP itself is an established rail services business which provides driver training, route mapping, route mineralisation and lots of similar services in the UK rail industry. It’s got customers including train operating companies, freight operating companies and, as it stands today, it has about 40% of those as customers.
So, it brings a considerable enhancement strength to our rail capability at Pennant International.
Q2: From a strategic perspective, what does the acquisition offer the group?
A2: Firstly, TAP itself consolidates our existing rail offering and it aligns very closely with our own track access business which we acquired in 2019, and opens up that potential for cross-selling between the two entities.
There is also an element of rail activity that goes on across the group in terms of tech pubs, graphical interfaces, modelling, and the acquisition of TAP brings a number of benefits for that:
- Firstly, obviously, the acquisition of TAP removes a direct competitor from the UK rail market which is good news for us.
- Secondly, as I mentioned, the breadth of their relationships with new customers, with their train operating companies and freight operating companies adds a new customer base for us.
- Thirdly, which aligns neatly with our strategy objective is the fact that it increases repeat business and our visibility of earnings. 50% of TAP’s revenue is recurring on a subscription-based model so that’s good news.
- Finally, we have been predominantly a defence focused entity. As much as 85% of our revenues come from the defence sector which is good but it does offer us further diversification which is a longer term strategic objective for us.
Q3: What do you anticipate as being the financial impact of the acquisition?
A3: The management account for TAP for the year ended 31st March 2023, just a few weeks ago, indicate that it will deliver a Profit before Tax of about £200,000 on revenues of about £600,000.
The net consideration is expected to be about £585,000 and that’s made up from an initial 70% payment with 30% of the price coming around 12 months after completion, which is all being funded by Pennant International’s cash resources.
I guess the key point from an investor/shareholder perspective is that as an established and profitable business, the acquisition will be earnings enhancing from day one which is good news. The business also provides a meaningful recurring revenue stream customer base that is new to the business.
So, I note this morning that our analysts have actually upgrades their forecast in the market so clearly, it’s been received positively by analysts and we’ve seen uplifts in revenues and earnings for ’23 and ’24 on the back of this acquisition.