Fool's Eye View

[ November 20, 2000 ]

Torotrak Interims

By Rob Davies (TMFEssex)

Carburton Street, London -- Scrapheap Challenge is a TV show where the contestants have to build something out of scrap in a day, and then race against each other the next. Last night's programme saw the teams building dragsters. Unfortunately, one side used an automatic gearbox and, when the full 160 hp of a V8 was applied, all the forward gears promptly failed. But British bodging prevailed and, by inverting the back axle, the machine was able to speed to second place using reverse gear only.

This graphic illustration shows how important gearboxes are, and the quest to design better and better ones is unrelenting. Torotrak (LSE: TRK) has designed an improved automatic gearbox using an infinitely variable transmission (IVT). By eliminating the step changes in engine speed required by other gearboxes an engine using an IVT can run at a constant speed, and is therefore more efficient.

The interim results from Torotrak today detail the progress it is making in getting its technology accepted by the major carmakers around the world. However, it does admit that these are turbulent times for the industry, as evidenced by the sale of Rover, losses at Chrysler and major problems at some Asian companies, all combined with increasing regulatory pressure for lower pollution and car prices.

With this background it is perhaps not surprising that the shares lost 32p to 405p after a news release that was little more than a holding statement. When the headline comment says "Driving towards implementation readiness" and ends by saying it has sufficient funding, it is really saying there is no news.

Torotrak will not make gearboxes, but it hopes to receive royalties from each one produced by its licensees. So its main aim is to persuade carmakers to adopt its designs. However, the news of a 12-week delay in the delivery of Series 3 transmissions to Ford and GM for testing in SUVs (sports utility vehicles), as a result of problems with bought-in components, is not good news.

In terms of hard news on contracts there is little to report. Both Ford and GM are continuing evaluation work, as is BMW. Negotiations are in hand with two other companies and discussions were held with a further eight. Nevertheless, because the SUV is a uniquely American vehicle (no one else can afford to run 4-ton trucks doing 10 mpg) the future of the company is crucially dependent on the success of the trials with the US manufacturers.

The financial data released today is mostly irrelevant except for the net cash figure of £24m and the cash burn over the last six months of £5.3m. At that rate it should be OK for the next two years, and a market capitalisation of £464m indicates that investors are comfortable with that. Maybe it should have given one of its IVT transmissions to the Scrapheap Challengers for a really good demonstration of what it can do.

What Next?

• The Torotrak discussion board will have lots of informed comment on these results.