|Shares Out. (in M):||300||P/E||15||13|
|Market Cap (in $M):||400||P/FCF||10||8.5|
|Net Debt (in $M):||26||EBIT||45||56|
It’s off the beaten path, a secular organic grower, vertically integrated & competitively advantaged, with an aligned founder/CEO/controlling shareowner. This is a SaaS company, with offline components which differentiate their abilities from peers, at a realistic valuation of sub 8x ebitda, & ~3x revenues that has been consistently profitable, now trading at ~10.7x cash flow generated.
Cartrack is a telematics company that provides fleet management solutions to owners of vehicles delivered as software-as-a-service. This includes vehicle tracking with built-in data collection, analysis & communications, and insurance telematics with physical vehicle recovery as a safety & security service.
They provide a dashboard for management (not dissimilar to the way one sees the motion of local cars when hailing an Uber) with a big buttoned app for each individual driver allowing instant communications, safety warnings, all manner of data tracking, and on the go updates. This leads to increased fleet productivity and workforce efficiency, is a step forward in safety and security, and reduces costs while making regulatory compliance as simple as pressing a button to run & file reports.
Their market cap of 5.7B Rand (There are ~14.1 ZAR to the USD) equates to about US$400m, with 300m shares outstanding. There is about $27m in debt and minority interests, plus a bit of cash putting the EV at ~US$428m. These charts from the company are in Rand, but I’ll use USD for figures going forward, unless otherwise specified.
In the June quarter the business passed the 1 million active subscribers mark, across 24 countries on 5 continents. Each pays on avg $125/year, recurring annually, for the SaaS product… It’s stable, annuity revenue, with high forward visibility through proven customer retention. Their 64 month average subscriber life cycle approximately matches duration of vehicle ownership until replacement. Subscriber growth is up from 751k active subs at the end of Feb 2018, and up from 246k at the end of Feb 2012, with growth now accelerating into an underpenetrated marketplace in all geographies.
This company has been built from scratch, in a hand curated way, by Zak Calisto, the Founder & CEO, and his team. They have grown entirely organically, with no acquisitions, in a manner of controlled growth, paying dividends along the way, and have a culture focused on an excellent customer experience with high levels of customer service and satisfaction.
They are totally vertically integrated. The software is 100% built in-house, now housed in their R&D center in Singapore, and they own all their core telematics IP. In addition, they manufacture the device that goes into the vehicle for tracking and data collection. This goes far beyond location tracking offered by some competitors, to include measurements of fuel consumption, tracking time in use with distances & speeds traveled, and advises on safety and maintenance among many other features. They also have internal Sales and Customer Service teams, plus they do their own vehicle recoveries in-house.
Helping to accelerate their growth and lower their customer acquisition costs, they have recently begun having the tracking devices installed at the OEM level, so new vehicles will come with a free trial. This is broadening their customer reach and lowering costs by substituting lower pre-sale install costs compared with the previous model of advertising leading to trial with install and ultimately a sale. The OEM dealers love this because the remote tracking allows them to more effectively manage vehicle warranties, monitor service due dates, provide accident & breakdown assistance, and generally enhances customer service. The OEMs climbing on board over the past year is a major differentiator.
The OEM change also comes with some accounting changes because under accounting rules they can’t classify devices pre-installed at the dealers as normal unsold inventory, so they had to expense them all. The COGS change pressured ebitda down to 45% from approximately 50% in the fiscal year ended Feb 2019. This accounting noise basically pulls forward some expense, for a program that is providing economies of scale across their business and extending their sales reach.
Regulatory tailwinds are helping. Government regulations have been passed in many jurisdictions requiring commercial fleet managers to use electronic logging devices (ELDs) to track data and provide reporting on a driver’s Record of Duty Status (RODS) to improve safety and reduce carbon footprints. In the US for example, under the ELD mandate, commercial driving operations must now keep records and file monthly reports on HOS (hours of service) and the IFTA (International Fuel Tax Agreement), and daily Driver Vehicle Inspection Reports (DVIR). Similar regs such as Europe’s E-Call initiative, Brazil’s Contran 245 Mandate, DLT taxi GPS in Thailand, and many others elsewhere are eliminating the old paper-based tracking systems, and driving demand for turnkey solutions.
There are a myriad of additional demand drivers from autonomous vehicles and smart transport, to the IoT and new applications of technology. The telematics & broadband costs to track a vehicle has become low enough to enter the individual consumer market with all sorts of new services offered. Insurance companies are adopting telematics rapidly to assist with assessing driver risk and to tailor premiums to an individual driver’s risk profile.
Crime is also a driving factor, especially in developing economies in Africa, South America, and Asia where there is need to lower insurance costs and increase levels of personal security in the event of a vehicle hijack. Cartrack is among the few really adding value in this area because their Stolen Vehicle Recovery services, which have an audited 92% recovery rate, allow them to offer a recovery warranty. This is a major differentiator that cloud only operators can’t offer. In their home market of South Africa, for example, they have trained recovery teams ready to go 24/7, collaborate with law enforcement, and when a theft is in progress may even send this chopper to help track and safeguard your vehicle:
To meet growing demand, Cartrack has spent heavily, with a 60% increase in sales personnel last year. This resulted in 209k new active sub additions in fiscal 2019, up 28%, and is expected to reveal its full impact in the current fiscal year (we’re now in fiscal 2020 ending February). An accelerated growth phase has begun.
In addition, the company is rolling out new value-added services on top of its SaaS platform to its installed base that is now over 1 million strong. These include insurance aggregation services, which utilize driving data (speed, safety, frequency on known routes, etc) to help bring down insurance costs. They are launching a Vehicle Trader application to help customers dispose of used vehicles across their network and beyond. And they’ve launched Back Office Administration services, which has already seen huge uptake rates in Europe and will be launching in South Africa in the next few months.
They are the lowest cost provider of their services thanks to their vertical integration which embeds ability for quick turnaround on innovation & execution, and it gives them great flexibility to adapt to changing trends. Being the low-cost provider may be an insulating factor, if and when price pressures emerge in customer turf wars to come. Management expects margins to expand as penetration increases, but to be conservative I’ve modeled declining average sales prices per vehicle at steady but lower than historical margins with a 12% add-on sales rate to the SaaS platform. Having grown to over 1m active subs, and with regulatory catalysts across the globe, I can see a likely glidepath ahead into multi-millions of Subscribers. Over 2-3 years they will climb onto this chart organically. Adding 250k Subs this year and 300k next gets them to the 1.5m Subs column:
The software is a scalable platform and could be extended to new types of customers. The application of telemetry data will have major impacts on costs and efficiencies well beyond commercial fleets. One can imagine the opportunities at other vehicle heavy operations such as Airports, Army Bases, Golf Courses, Sports Arenas, Collegiate and Corporate Campuses, etc. None of this is contemplated in the above.
TAM (total addressable market) is growing fast. There are many forecasts out there, but the company cites Goldstein Research and Gartner which have the global telematics market growing 20.9% annually through 2024, with dramatic revenue increases to $55B by 2021.
I believe in time they will be takeover bait. While the CEO and his family have control at ~68.5%, he’s in his mid 50s, has already written much of his magnum opus and has founded and operated a number of businesses over the course of his career. So, I don’t think he’s immune to temptations given the obvious and vast valuation disparity between South African SaaS compared with US & EU SaaS nuttiness in bubble territory. International SaaS comps, Softbank, and Private Equity firms have been acquisitive at MUCH higher multiples than the company is trading for… and they’ve done so in smaller and less profitable companies than Cartrack on similar growth trajectories (some imagined).
So, compared to the model where one can quibble with the assumptions and multiples, I could realistically see Cartrack getting taken out for a lot higher than 3x revenues or 8x ebitda given the nutty multiples of public companies in the space which are 6-12x revenues (some as high as 25x) in the US & EU, and many of those “growth” companies don’t generate much ebitda, making Cartrack a coveted asset that could be expanded faster with the distribution capabilities of the larger players.
So, while I shudder to think of cash burning companies trading at 10x+ revenues, who are hell bent on hanging onto that multiple, being willing to pay 6x+ revs for Cartrack… and I waiver on whether that’s a sound part of the thesis, I’m comfortable owning Cartrack as a growing entity at reasonable valuation. Also, The CEO and family bought ~1.4m more shares when the price dipped to ZAR13 in November, saying on the call “we couldn’t resist.” So, I consider that a floor.
There is key man risk and political risk, both of which I consider remote. There is more tangible risk of bubble funded comps acting as non-economic operators to gain share at any cost. So far this hasn’t happened, and if it did it would likely be in the US and Western Europe which aren’t the core markets… At least not yet!
- - Milestones for Active Subscribers and Annuity Revenues
- - Expanding margins as market penetration increases
- - Additional regulatory mandates driving demand
- - Add-on revenues may well surprise to the upside
- - A bigger SaaS Co could come along a pay up to acquire them
|Subject||Re: OEM risk ?|
|Entry||07/09/2019 09:46 AM|
In my mind, I don't consider it realistic that OEMs would compete near term. They're already getting the benefits of tracking their customers without having to constantly innovate and update a complex online and offline system, and they prefer simplicity for large volume manufacturing. Also, fleet managers need a system that covers all vehicles in their fleet, of any brand. They certainly won't use multiple systems for Toyota vs Ford vs GM. As you point out, I do think they would want the recurring revenues, but that's someday in the future when there is a developed market for passenger vehicle telematics, compared with a much smaller current market for mostly commercial vehicles. I could see them buying someone like CTK SJ in the future, but that's after the industry develops and telematics penetration increases quite a bit.
On liquidity, it traded 52k/day since the end of May, which is when the stock started lifting. In USD, that's approximately $70k/day. Not alot, but better than par with most companies of similar size market cap.
|Subject||Re: Re: OEM risk ? - Liquidity revised|
|Entry||07/09/2019 10:01 AM|
MKO, Scratch that part on liquidity...
I confused the volumes with another ticker. What I meant to say is it trades on avg 126k shares a day, which at current price is approx US$170k/day, though with wide variance daily. For a large holder it's a bit private equity-like, but not unusual for similar size market caps.
|Subject||Very Interesting Idea - Few Questions Related to Total Size of the Market|
|Entry||07/09/2019 12:41 PM|
Thank you for this idea. It is phenomenally interesting (though it is disappointing that it is so small and it would be hard to take advantage of in any large size). I have a few questions related to the fundamentals of the business:
1) According to Bloomberg, Gross Margins have come down from ~81% to ~71% on an LTM basis. What is the reason for this massive decrease?
2) The business seems incredibly interesting, but I believe that there are many companies that have implemented a similar thing in the U.S. as it relates to the Electronic Logging Devices (ELD) regulation that was put in place last year. What is the competitive differentiation? This question 'sort of' follows the logic of Mko2016's question on the OEMs.
3) What is the geographic mix of revenues / what is the potential to increase geographic dispersion? Their website seems to imply they only have offices in South Africa. Do they size a TAM?
4) Why do you think this company is trading at such a low valuation?
5) What do you think of the controlling shareholder / CEO?
6) Who do you think the most likely acquiror would be?
7) They note that there are logical adjacent markets (like PP&E utilization statistics). What % of their revenue is that kind of application and what do you think the total size of this part of the business is?
|Subject||Re: Very Interesting Idea - Few Questions Related to Total Size of the Market|
|Entry||07/09/2019 04:11 PM|
Thanks for the Q's... See below:
|Subject||Re: Re: Very Interesting Idea - Few Questions Related to Total Size of the Market|
|Entry||07/10/2019 10:17 PM|
Thanks for unearthing and sharing an interesting opportunity.
Regarding potential acquirors, the SaaS companies you outlined (TEAM, Workday, Salesforce) seem fairly random to me. I can’t picture any of those guys wanting this business. Do you have any rationale besides them having acquired other SaaS companies previously? Strategically, I don’t see the logic with any of those.
OTOH, private equity (or PE-like publics) or re-listing into the US seem more likely to me. Heck, even large insurance companies seem more likely (though unless and until CTK achieves meaningful US and DM penetration, that’s not likely). Maybe I could even see fleet-related businesses (FleetCor?), though that’s a stretch. But Atlassian, Workday, and Salesforce just seem random.
My two cents. Otherwise, I am fascinated by this write up. Thank you.
|Subject||Vertical Integration, SaaS, Management|
|Entry||07/11/2019 03:07 AM|
Thank you for the well-written write-up perspicar,
I read Cartrack reports time ago and found them interesting. Talked to IR and management (Skype) and I do not know, for some reason guts feeling made me quite uneasy.
(1) Why do they have a cost advantage by being vertically integrated? In the end you might have a cost advantage at the P&L level but making your own devices makes you more capital intensive at the same time. Could you split ROCEs for software and hardware production if it makes sense here (see questions below)? Most of the times I see vertical integration there is not a compelling case for it. Is it here? In other words:
· What are the specific process and/or customer benefits of having hardware and software under the same umbrella? Is it for example like Apple where the interaction of both bodes well for a better customer experience?
· Is it hardware simply a toaster or is there any supply shortage/scarcity of materials/challenging production process on the hardware side that justifies making it in house?
(2) Have you figured out at least up to a level subs unit economics? Churn, LTVs, cohorts and the like? As far as I remember they do not disclose them because “they do not see it the business that way”. Every time that a SaaS company “does not see the business that way”, I raise eyebrows.
(3) Zak Calisto apparently lives in Singapore. How did he explain the fact that he lives there but Cartrack makes most of his business in Africa and Singapore is just a tiny chunk insofar?
Thanks and all the best.
|Subject||Re: Re: Re: Very Interesting Idea - Few Questions Related to Total Size of the Market|
|Entry||07/12/2019 01:27 PM|
I see motivators for SaaS companies to acquire because they need to show top line growth at any cost to hang onto their very high revenue multiples.
TEAM has been a frequent acquirer (Wikidocs, Dogwood Labs, Trello, OpsGenie, InVision, AgileCraft, MyVillage) which all fit loosely into their project management/online community focus. I could easily see them liking Cartrack for fleet management, and the additional revenue would be of great interest given it's an instant double digit increase. A transaction would be highly accretive at any reasonable price due to TEAM's high multiple and Cartrack's profitability.
Timing on a team-up is probably out year at a minimum because Cartrack has just entered a phase of faster growth. Once that normalizes, I'd think they'd be open to discussion. Hope the SaaS hi-fliers can hold onto their multiples through then.
As you pointed out, PE and strategics could also emerge. And, a US listing may well be the easiest path to a better multiple and increased street coverage.
|Subject||Re: Vertical Integration, SaaS, Management|
|Entry||07/12/2019 02:19 PM|
1) Vertical integration: I hear you on the capital costs of in-house mfg, but they don't seem to have a bloated amount of PP&E. Net PP&E/EBITDA is 0.89x... in line with the better manufacturers. I think it's worth the speed advantages given constant new world-wide regulatory changes requiring both software and/or hardware tweaks. I'd also point out their cost advantage isn't small. A US based competitor who said they have over 10,000 customers and just signed up Anheuser-busch, named Samsara, wants $129 for the hardware plus $400/year for small to midsize fleets. Cartrack is about $125/year all in, and Samsara can't compete at that level.
2) Unit Economics: When there are sizeable fixed costs in a business, unit economics get less meaningfull than with highly variable cost businesses. They generate approximately $56/sub on approximately $125 in rev. There's a 64 month avg sub life cycle which approximately matches duration of vehicle ownership until replacement, leading to churn of 15-17%... but misleading because many re-sign with a new vehicle purchase.
3) The R&D facility is in Singapore, so that's where Zak is based. He has good flexibility with able managers Harry Louw (CEO: South Africa), Jessie Young (CIO), and Brendan Horan (Strategy), and Richard Schubert (COO), among others. Though SA is the original core, it's clear this is growing into an internationally diverse company over time.