The Quartix Holdings (LSE: QTX) share price has been trending higher since last autumn. but there was a correction downwards of about 40% before that, so does the drift up now reflect positive developments in the underlying business?
Two divisions battling it out
The firm started up in 2001 supplying vehicle tracking systems and services to the fleet and insurance sectors. But the story over the past couple of years is that the directors have reviewed operations in the tough insurance market and vowed to “only add new insurance business if the quality of service and product innovation we offer are appropriately valued.”
In other words, management has decided to only take business in the insurance sector if it offers decent profits. I think that decision led to lower volumes from insurance, and when these were flagged to the market, the share price declined to reduce the firm’s valuation. But the valuation was previously high, reflecting the company’s potential to grow, so the stock market’s judgement looks sound given the increased uncertainty in the outlook.
Today’s half-year results continue the narrative. Overall company revenue declined by 3% compared to the equivalent period last year, but within that figure, we can see the firm’s two operating segments battling it out. Revenue from the troubled insurance sector declined by 35% to £2.5m, while revenue from the fleet sector grew by 11% to just over £10m.
If those revenue trends continue, I reckon insurance revenue will become less of a problem anyway. Meanwhile, we are seeing decent top-line growth from the fleet sector, which is flowing in to replace lost revenues from insurance. At some point, it seems likely that fleet revenues could expand sufficiently to produce overall revenue growth for Quartix, which means the drift up in the stock could make sense.
Strong cash flow
Although diluted earnings per share declined by just over 17%, the company delivered good news on cash flow, which I think underlines the attractions of the business model because it generates recurring revenue and subscription-based income. Cash from operations rose 5% to £3.5m generating free cash flow of £3.2m, which is up 12%.
The great thing about free cash flow is that a firm can use it to pay dividends to shareholders, and the directors announced an interim dividend of 2.4p, which is the same as last year’s payment. The policy is to set total dividends for the year at around 50% of cash flow from operations, which strikes me as a sensible approach. However, the directors will also consider additional special dividend payments to distribute “the excess of cash balances over £2m.”
There are some impressive double-digit percentage figures in the report for new fleet installations and subscriptions. My view is that the growth story is alive and kicking, albeit in the temporary shade of lacklustre performance from the insurance sector. Is this an opportunity for investors? Maybe. At the recent share price of 277p, the forward-looking earnings multiple for 2020 is around 23 and the anticipated dividend yield is close to 4%. I think it’s rare to find such decent growth-potential married to a chunky dividend, so for me, the stock is attractive.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Quartix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.