Wednesday, 13 April 2011

Pixellation of a share price

A brief update from January (read earlier Blog), because things have moved on a bit since then at Torotrak in Leyland.

Firstly if you missed the Geneva motorshow - you will have missed out the news that Tata (owners of landrover and jaguar amongst others) showed off a prototype of a new super-mini passenger car - the Tata Pixel.

The good news is that since then Tata have committed to production of the Pixel, potentially in as little as three years. Despite it being a prototype the one thing that they have said will carry over to production will be it's ability to turn on a very small turning circle. The good news for Torotrak shareholders is that this is enabled by using a Torotrak transmission in the rear axle - so it looks like the transmission at last has a potential customer in the automotive sector.
The shareprice responded by going from about 20p through 50p and then settling at about 41p.
I know in the January blog I ruled out in my personal opinion any inclusion of the TRK transmission in the Tata Nano - their other car which is already in production - so technically I'm right on that note - however I'll confess that I expected Tata to come out with a bus-sized transmission before they went to the automotive sector.
It's nice to be wrong every now and again. We await news over the next few years of pre-production testing and what-car sneak-peak reviews from Warwick where the car is being developed.

Allison wholemeal
When questions start about what is going to be the bread and butter revenue and dividend income for Torotrak over the years, today's (13th April 2011) announcement on the continuing license deal to go to production-ready design with Allison might be the answer.

Basically it's an £8m license continuation fee in the 14,000 tonne vehicle market. Importantly the other licencee in this market (the unnamed European Truck and Bus Manufacture ETBM) have exclusive rights from when they started their program - so if Allison had not renewed their license - it would have handed global exclusivity to the ETBM and prevented Allison from being able to continue their work - despite being 9% shareholders in Torotrak until 2013. On reflection it looks like common sense that Allison were going to renew their license - the question was always - how much and for how long ? well 2013 is the answer - so here's two years work for Torotrak in engineering consultancy.

If you can unwind the wording about what rights they have after 2013 - well that's anybodies guess. Also - getting to production ready is not the same as a production announcement - so lets keep an eye on the directors 2013 vesting share options to make sure they don't slip past the radar of the remuneration committee (they are subject to the  transmission being in production, not just designed for production - there is a vast difference as we found out at MTD).

It is overall excellent news and I'm pleased to see that Allison didn't wait to the last - which is a good indication of a working relationship between the two companies.

It is also important to note the comments of the latest news about fuel economy legislation as well as NOx legislation (Euro IV) where it goes as far as saying that Torotrak technology can help with this by running the engine at it's most efficient operating points. It stops short of saying it can meet EuroIV totally - but then I guess that depends on the engine design that you have strapped it to in the first place.

The announcement also takes the chance to mention the other large truck programme - ETBM which is so far confidential as to who it is. We await the confirmation that the ETBM has completed testing of their new vehicle (confirmed as handed over to them by Torotrak) - but that might take another year or so. If they break cover on production design plans that might also have a material impact on the shareprice.

So, whilst we watch the shareprice touch 50p today up from 42p, the next publicised news will be the year end report on May the 24th (the FY year ended on March the 31st so it will miss this Allison announcement).

Keep an eye out for the year end report, as progress on the Flybrid project on automotive vehicles (jaguar) will hopefully again push Torotrak into the wider public conciousness. Rotrak might make an outside showing of positive test results - but they might not have made any test units yet - we watch and wait.

Congratualtions to all those who have now broken back through your break even price on Torotrak holdings. I for one won't be selling at any time soon - I've factored in the cost of 10 years of holding this share and the price has to rise a fair bit more for me to hit that particular break even point - and anyway - I'm investing to make a profit - otherwise - why invest.

One thing the Allison announcement does give us - a potential royalty stream being derived from about 2015 if they make it into production. So that's only four more years to go. They might want to go a bit faster if they are to keep below the legislation restrictions on the horizon.

Good luck and until next time

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