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Lhasa   Friday, 12/05/08 06:07:23 AM
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The Latest Broker Report

Arbuthnot Report 25/11/08 (11/25/08 for any American readers)

Torotrak reported H109 results slightly ahead of expectations, with revenues of £0.9m, and PBT (loss) of £1.9m (£2.3m estimate), and EPS (loss) of 1.27p. We also note a cash balance of £9.7m. It is important to note that (as in 2008) we expect the revenues and earnings to be second-half weighted. The statement reads positively, and it is clear that progress continues to be made in a number of places. However, it is also clear that the make up of contributions continues to be different from our original expectations. In particular, we note that there has been a notably slower start at Infinitrak, linked to a significantly more challenging economic backdrop. However, the development of the work in the truck and bus segment is continuing at a faster rate than we had anticipated. In addition, the company has stated that it is working with an enlarged number of prospective customers, particularly relating to licensees and engineering development programmes. In light of this, we are making some changes to our earnings estimates at the revenue line to reflect the change in business mix. At the PBT level, however, we are making no material changes.

Outdoor Power Equipment (OPE, Infinitrak)
At Infinitrak, the company has now started manufacturing of the twin-toroidal transmissions (TTT) at the US manufacturing facility. However, the economic pressures have been mounting in the US, and this has noticeably impacted demand for tractor mowers (and their transmissions), especially at the premium end of the market. To this end, we have downgraded our volume assumptions to 20,000 units for the year 2010E. However, we note that Infinitrak has also become more involved in the development of a more general transmission, with broader market appeal, to spearhead its activities with external customers (i.e. outside MTD), and we would expect to see the market introduction of this in 2009.

Truck and Bus
In the truck and bus sector, Torotrak’s existing licence and engineering development programme with a leading OEM is progressing well, with noteworthy benefits by way of improved fuel efficiency and emissions. It is clear that the potential reach of the technology is greater than originally anticipated, and this agreement effectively demonstrates the scalability of the technology into the heavy-duty segment. This business unit should deliver short-and medium-term licence and engineering income, and future royalty income streams.

Off Highway
Two of Torotrak’s key licensees – Iseki and Carraro – are continuing their development work towards series production and market introduction, which we estimate will be in late 2010. There has also been some progress in the Fork Lift Truck (FLT) segment, with prototype transmission under internal evaluation in a customer vehicle. While the early feedback has been positive, in our model we assume no benefit from the FLT segment until 2010E, and we believe it would be prudent to assume no changes to this until the results of the prototype programme are clearer.

Automotive
In the Automotive sector, as part of a consortium (Jaguar, Ford, Prodrive, Ricardo, Flybrid), Torotrak has started work on its kinetic energy recovery system (KERS) for mainstream passenger cars. While there has been much development of the technology in the F1 arena, the timing of technology adoption into F1 remains somewhat uncertain. Although early days for this project, our earnings model currently assumes no benefit from this.

Torotrak is also working with Aisin AW on a number of development programmes for mainstream automotive. The focus has shifted over the last 12 months from the premium segment towards higher volume smaller car applications (benefiting from the development work with Infinitrak). We also note that the company has started work for a new small car transmission with another new Tier-1 supplier.

The work with Tata is continuing well. As we have commented in previous reports, the scope of the licence is beyond the entry-level vehicles, and now covers a significantly wider application of the technology across a broader product range. We expect the main revenue driver from this to be from engineering and licence fees in the medium term.

Earnings
The delay and slower start at Infinitrak, coupled with a more cautious outlook for OPE in the US against the difficult economic backdrop has led us to reduce our revenue estimates (although no changes at the earnings level). While we remain confident that the long-term prospects remain strong, essentially, the mix in earnings is changed, and we now assume a greater earnings contribution from engineering and licence fees. While our PBT estimates remain unchanged, we now assume revenues in 2010E of c.£4m (from £8.45m), and in 2011E of £11m (from £15.9m).

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