NEWS | Wednesday, 21 November 2007

Datatrak registers loss in first half

Datatrak Holdings plc, listed on the alternative listings of the Malta Stock Exchange, registered a decrease in turnover compared to the previous financial year.
The interim results published recently show the company registering a loss before tax of Lm55,00. This is off the mark from the profit before tax of Lm52,000 registered this time last year.
The Directors explained in their statement that there was an increase in the amortization charge, in wages and salaries, marketing and finance costs. It must be noted that new loans were utilised by Datatrak Solutions and the listed company Datatrak Holdings. Market analysts will note that finance costs incurred in the first half of 2007 will repeat themselves in the latter part of the financial year.
The Directors did mention a list of sales initiatives that the group is undertaking. An impatient market reacted negatively following these results, an indication that certain investors have had enough of waiting for their investments to give them fruitful returns. Datatrak’s shareholders have never reaped a dividend.
The report states that the directors have signed a number of non-exclusive channel sales agreements in Italy and one of the subsidiaries. Dispatch IT is undergoing a major technology repreperation leading to beta testing, which will lead to another saleable product. Whether more income shall be registered by year’s end is not being mentioned. Yet, the directors are confident of the promising prospects and improved performance for local sales.

A paragraph to ponder in the report is the commentary on Datatrak’s operation in Nigeria. The company is still negotiating a supply and license agreement for its Nigerian Joint Venture to take on the LF/UH Network and financing is still an issue.
Looking ahead for the second half of 2007 the directors had a more positive outlook in terms of revenue generated though they do mention that financing remains a key issue. Additional funds are needed in the second half for their subsidiaries to upgrade their technology and to expand their product base. Their Nigerian operation needs financing for it to be able to buy Datatrak’s network.
There is a very important cautionary note by the Board with regards to write-down of the value of the local assets. It is estimated that if there is a further delay in the plans of the Nigerian operation, the Board would have to write-down the value of the LF/UHF network equipment held by the group. The quantum of this write down ranges from Lm1.8 million to Lm2.8 million with a direct consequential impact on the Group’s Net Assets. However the Directors state that they will convene an extraordinary meeting to explain this write-down.
The Group is also experiencing some challenges on the payroll side to retain employees and to procure adequate financing.
Investors will have their eyes peeled on the Nigerian operation since there is still quite some way to go before any concrete deal is concluded. At the pace of the negotiations it may mean that they will have to recommend to the shareholders a write-down in the value of the Net Assets in the Balance Sheet. If this happens the quantum of the figures would wipe out at the least, all the value of accumulated retained earnings, share premium as well as part of the Issued Capital value.
Such a dilution in value would affect the shareholder’s value of investment at par and possibly at market price.
The Datatrak Group has for the last six months, not registered a profit. Last year it only registered a profit from companies that were not completely fully owned by it. Investors know that the Group’s CEO owns part of the joint ventures which Datatrak Holdings has. It is these companies that are returning a profit and because of this their confidence within the group will remain. Another point is that the majority of the initial investors and promoters, including another listed company, Maltacom are still investors.
This may have led to some private shareholders to be enticed to participate in this project.
The financials of Datatrak are a borderline case. The total equity value does surpass the full written down value of the Net Assets if this is ever undertaken. In the business it operates, Datatrak has a high value of intangible assets part of which represents software developments. Moreover, there is also a deferred tax asset that the company needs to realise. Going through the cash flow one notes that Datatrak has reduced its negative cash flow portion as a result of proceeds from the maturity of financial assets.
The Datatrak Board has published the full notes with the interim financial statements and they make an important statement. The going concern basis is dependent on the outcome of certain projects. The expected cash flow will be the result of the successful outcome of these projects.
After the publication of the interim results Datatrak’s Nigerian operation received a license to provide and operate a public mobile communications service for its vehicle tracking service. Negotiations on financing are however still ongoing. If the Nigerian deal fails the balance sheet of the whole group is dented. If it does succeed investors will expect to be informed of future revenue streams.
Investing in an alternative listed company is always inherent with risk. Investing in a company that is dependent on the success of an operation in Nigeria is obviously riskier.