Journeo – why it’s not too late to get on board this undervalued international growth story

Investment Case

• Well positioned to take advantage of major investment in public transport infrastructure needed to meet Net Zero commitments.
• Significant investment into R&D to create industry leading turnkey transport management solutions, creating high barriers to entry.
• Well-executed acquisition strategy creating platform for cross-selling and international expansion, with strong balance sheet offering opportunity for further deals. 
• Regular earnings upgrades mean the shares remain cheap despite strong appreciation over the last two years.

The Market

Discussions of the role of transportation in the energy transition almost always turn to how quickly we will switch from internal combustion to electric powered cars. But there is a potentially more important route to Net Zero receives far more scant attention: the expansion of public transportation. 

Although the adoption of EVs will, of course, significantly reduce environmental pollution, getting people out of their cars and onto public transport could have an even greater impact. In the UK alone, more than 85% of passenger kilometres are taken by cars and vans, contributing around a quarter of the country’s total greenhouse gas emissions. Meanwhile, the use of buses and coaches has halved since the 1960s, especially since deregulation in 1985, which has seen the number of annual bus journeys drop by 1.5 billion by 2019, and 300 million fewer miles driven by buses per year since 2010 and austerity-driven cuts to many services.

The maths is simple: more people on public transport means fewer vehicles on the road, and far lower energy usage per passenger, especially if vehicles themselves are run on electricity. What’s more, even if new cars are electric, that’s still an environmental saving based on the carbon embedded in their manufacture – and many people simply can’t afford EVs, widening social division and diminishing productivity as some people struggle to get to work. 

And although they have so far proved a source of much opprobrium from a noisy minority, the concept of 15-minute cities – in which green spaces and public transport take precedence over car parks and roads - is becoming a key tenet of modern urban design. Already cities including Paris are experimenting with the approach, while in the UK The Trade Union Congress has recently called for £18bn more a year to be invested over the same period to cut car use by a fifth and unlock a £52bn GDP boost through productivity gains. 

Although in recent years the government has committed to significant public transport investment, not least the £5.7bn provided through City Region Sustainable Transport Settlements across 8 city regions over five-years, the TUC argues this is insufficient. It’s noteworthy that in countries where there has been higher investment in public transport systems that usage is higher. In Austria, for example 34% of commuters use public transport, far higher than the UK and no doubt the result of its efficient and affordable tram network.

Stretched public finances may limit the ability of what looks certain to be an incoming Labour government to up investment in public transport. And after years of underinvestment in some regions and poorly performing services, convincing people to get back onto public transport is easier said than done. Nevertheless, with underinvestment and a changing political wind comes opportunity, and that’s where Journeo (JNEO) offers investors a highly enticing prospect. 

The company

One of the major difficulties in providing high quality public transportation is the sheer complexity and expense involved in its delivery – but making public transportation easier to use, safer, more pleasant, and more efficient could solve a problem that money alone cannot. 

To that end, Journeo has been building up a portfolio of technology and services over the last 25 years to address this problem, both organically and more recently through the major acquisitions of Infotec and MultiQ, That’s given it the ability to support smart city initiatives with connected and intelligent transport systems, and the reputation among blue chip local authorities, passenger transport executives, and multimodal fleet operators that it can deliver – important in a market with demanding procurement procedures among the high barriers to entry. 

Technology investment also creates barriers to entry. Alongside significant investment in R&D – £6m over the last four years - the company works with leading equipment manufacturers and specialist technology suppliers to develop its products, and more recently it’s been developing solutions based on Internet of Things (IoT) technology and open standards to improve integration with legacy systems. These ISO accredited products and associated software solutions are sold through four divisions:

• Fleet: Focuses on the onboard solutions for the bus and rail market. It covers solutions such as advanced CCTV, remote condition monitoring of vehicles, driver monitoring and other telematics such as passenger counting. Customers pay a software subscription fee to access real-time information through the cloud-based Journeo portal. Behind this sits a suite of sophisticate SaaS-based software product, to which 30% of UK buses and 10% of trains are already connected.
• Passenger Information: Supplies passenger information systems to local authorities and passenger transport executive in towns, cities, ferry terminals and airports, including smart-ticketing and wayfinding. It can retrofit or install new digital signage units with pollution monitoring sensors and CCTV protection to deter vandalism. In addition, certain signs can be powered using renewable energy to access places without power supply.
• Infotec; Manufactures, installs, and maintains digital signage, predominantly for the rail market. Acquired by Journeo in 2023, it is the UK’s largest provider accounting for 80% of the market, with its in-house designed and built products installed in around 1,500 stations. Infotec also operates a large contract with the New York Subway, which although lower margin than its UK business offers a useful springboard into the US.
• MultiQ: Provides Intelligent Transport Solutions predominantly to the Nordic markets of Denmark, Sweden, and Iceland, consisting of fleet management software, on-board passenger infotainment, indoor and outdoor real-time display systems. Its SaaS based approach means 40% of revenues are recurring.

The last three years has also seen a concerted expansion of its airport capabilities following the launch of the company’s London Stansted Airport project, since when it’s won business at another 5 of the UK’s largest airports including Gatwick and Heathrow for airport car park transfer solutions. It’s also delivering solutions at Copenhagen and Dublin airports, paving the way for further international expansion in a travel industry bouncing back quickly from Covid. 

Finances

The fruits of its efforts can be seen clearly in the company’s results for the year end December 2023, release in late March. Sales more than doubled to £46.1m, of which an impressive 20% came organically from the existing fleet and passenger divisions. That led to an even more impressive 270% increase in underlying pre-tax profits to £4m, in line with market expectations that have been regularly upgraded over the last couple of years.

Importantly, hitting critical mass means underlying pre-tax profit margins are now rising sharply, almost doubling to 8.8% in the year. What’s more, the business is now highly cash generative, which means that alongside an oversubscribed equity fundraising in December 2022 it retains a net cash balance of £8.1m even after spending a combined £10.3m on acquisitions.

That gives it significant firepower to not only continue investing in developing valuable intellectual property and streamlining manufacturing – both margin enhancing - but also making further acquisitions. The latter are especially important as a means of entering new markets, in the case of Infotec the US, and MultiQ the Nordic which the company views as a launch pad into other big spending European markets. 

Acquisitions also present useful cross-selling opportunities, either bringing new capabilities into the group to sell to existing customers, or new customers not currently using Journeo’s products. That’s especially true of Infotec, whose large footprint in the railway display market brings the opportunity to sell to the 90% of UK railways not currently using its fleet management systems. The long-standing management due of CEO Russ Singleton and CFO Nick Lowe – with Journeo since 2013 and 2017, respectively - have already proven adept dealmakers, so expect more shrewd deals. 

Outlook & Valuation

That’s all translating into a growing order book and sales pipeline - although the company doesn’t give specific figures, the strength of the order book is reflected in broker Cavendish’s forecast for underlying EPS to climb 11.6% to 22.1p in FY 2024. 

Over the longer term, the company has spoken of growing annual revenues to £70m+, and at double digit operating margins – from the current margin of 9.3% on sales of £46.1m, that points to significant profit growth ahead. Further margin improvement is likely to come from replacing more third-party technology in its products with its own intellectual property and shifting more customers onto its SaaS platform. That, in turn, is likely to increase customer ‘stickiness’ and improve sales visibility as a higher proportion of revenues become annually recurring – currently, only around 13% of total sales. 

Management has also spoken of targeting adjacent markets such as commercial distribution or military customers, but even without such strategic shift there’s more than enough opportunity within passenger transportation to justify what remain a modestly value stock, even after two-and-a-half years of strong momentum that has seen the share price increase almost fivefold. The current forecast PE ratio of just over 11x is well below industry peers, for example rail software developer Tracsis (TRCS) which trades on a forecast PE of almost 27x.

Cavendish suggests a forecast PE of 17.4x would be a fairer, suggesting a target price of 385p – 50% higher than the current share price. That could prove conservative for a business befitting from many structural tailwinds, a strong track record of delivery, and many levers to pull within the business to keep sales and earnings on an improving trajectory. It’s not too late to hop aboard the Journeo journey. 

Ticker: JNEO

Sector: Industrial Support Services

Mid-price: 254.5p

Spread: 251-257p

12-month high/low: 294p / 180p

Market cap: £41.6m