ToroTrak fka LSE:TRK

[Lhasa]

The first page of broker's latest Torotrak coverage

dated 16th March. This perhaps may explain in part at least Torotrak's remarkable share price rise which closed today (March 23rd) at 48.5p/50p, up from just over 20p at the end of Feb.

"Torotrak’s technology has been in development for over a decade: why now? We believe that an improved technology is now meeting regulation-driven customer demand, within a strategy that has focussed the group on those applications where benefits can outweigh inertia. We focus on the nearest-tomarket area in main drive transmissions, the commercial vehicle programmes with Allison and the European Truck/Bus Maker, and the consequences for cash, revenues/profits and value of success in this market. Allison’s end March decision is the largest short term value driver, but by no means the only basis for our buy stance and valuation of 42p/share, based on a probability-weighted set of models for each application/market segment.

• If not now, when? Although Torotrak’s technology has applications across a wide range of vehicles and beyond into other rotating machinery, we focus on two areas. Commercial vehicles applications are large, advanced, and driven by the regulatory and customer needs for cleaner, more fuel efficient and better performing transmissions. In energy efficiency (through flywheel energy storage, or supercharging/engine downsizing) regulations are now driving the first major impetus in fuel economy for three decades, and Torotrak’s programmes offer low cost and easily adopted routes to reductions in emissions/km.

• Avoiding the barriers to adoption: We examine the barriers to adoption that stymied the previous efforts in main drive passenger car transmissions, how the situation has changed, and which markets and products combine potential with lower barriers to entry. Efficiency, emissions and driveability make Torotrak's technology more immediately beneficial in trucks and buses than in passenger cars. Key customers have internal reasons for adopting the technology, such as a clear strategic interest by Allison to upgrade its planetary automatic transmissions. There are many precedents for technology from niches being adopted into the mainstream auto market (disc and anti-lock brakes, diesel engines, electronic fuel injection, and now KERS).

• Applications and Value: Versus the technology, this report focuses on applications for Torotrak: the financial potential, routes to market, and the current stage of development of each line. This allows us to map out the milestones and related changes to Torotrak’s value. Given the importance of the potential payments from Allison due in March 2011, we set out options for the company if it receives up to £14m (high case, valuation 49p) or no extension of the licence at all (low case, valuation 27p) as well as our central case of an extension and expansion of the licence, with two £3m plus payments in FY12 and FY13. However, the range of possibilities also includes renegotiation to focus on planned production."