Description

MiX Telematics has been written up by zeke375 (in 2021), JohnKimble (in 2020), and Saltaire (in 2016).  Please refer to their write-up for a history of the company, an in-depth review of the business model, management team, and risks to consider.  I will focus on recent performance, highlight the more salient points, and discuss some near-term catalysts below.

Situation Overview:

MIXT is currently trading at an attractive price, the cheapest since 2015/2016, while also offering a potential inflection point in subscribers & revenue growth from the rebound of their oil and gas customers.  The stock is currently trading at ~1X EV/Sales FY'23 or ~4.5X EV/EBITDA FY'23 - a bargain for a growing subscription type of business that generates high returns on capital (25%-30%) and strong free cash flow (~$30m ex-growth capex).

I think that MIXT is available at near trough multiple and near trough margins/earnings (primarily due to the weak US oil & gas segment which is already recovering).

I believe we are going to see a re-run of the 2016 time period, following the decline in their oil/gas subscribers (already behind us now) and the subsequent recovery (already starting to happen). 

This is what happened when MIXT's business rebounded/grew out of the O&G slowdown in 2016:

Business Overview:

MIXT offers telematic solutions to fleets around the world - their core market position is higher service / larger fleet vs cheaper offerings (e.g. Geotab or even Samsara). Their offering is mostly sold through subscriptions with high retention rates; fleet customers typically sign 3-year contracts that are renewed at often lower prices as the hardware cost has long been amortized. Once the hardware is installed in a vehicle it is next to impossible to lose the customer to a competitor. The customer can switch off the service on a certain % of their fleet (as oil/gas customers have over the last two years) but they tend to come back once business rebounds, all MIXT has to do is flip a switch. The cashflow dynamics are what one would expect for a subscription business with upfront hardware/installation costs - in a slowdown, the business generates loads of cash (as was the case the year after covid started) and in periods preceding fast growth it generates less cash (increased hardware/installation costs). The industry is competitive but growing with a large TAM. It is pretty fragmented and regional. The fact that MIXT has a global presence helps in their sales efforts; Haliburton in the Middle East is more prone to sign up with MIXT if Haliburton USA is already a customer.

Pre-covid the company grew subscribers at ~10%/yr, subscriber revenue at ~15%/yr, and revenue per subscriber grew ~5%/yr due to bundling and upsells (e.g. to its Mix Vision solution). Apart from the covid hiccup, the business should resume growth and management foresees even better figures going forward.

Why now?

Revenue is already back to pre-covid levels but we can expect a continued acceleration of growth in subscribers, revenue, and EBITDA. In-vehicle capex is a leading indicator of growth and has increased to a record of $18.3M LTM March'22 (partially to mitigate supply-chain issues) from $4.3M the prior year and $13.6M the FY pre-covid. Low double-digit growth should be very achievable.

In addition, the bad news should be behind us with a rebound in progress. MIXT's America's subscription revenue had declined from $22M pre-covid to $14M LTM bringing that segment EBITDA from ~$10M to ~$1M. In the Americas, MIXT has a heavy concentration in oil & gas customers (e.g. Schlumberger) that are rebounding. As these O&G customers should be able to reactivate their MIXT services on existing assets, they should not require new hardware and installation - and this should result in a very high incremental margin and cash flow for MIXT.

Regarding the energy segment, CEO had this to say in the last earnings call:

We've seen, in recent quarters, some modest growth. So pleased to report that, that segment is certainly returning to a growth contribution cycle from existing customers. It's not at the pace that we would ideally like. And in fact, we have seen in previous cycles that the return to investment takes longer than, I guess, the pace that they put the brakes on. So nonetheless, the signs are now positive.

It's also encouraging to see insider buying. Board director Ian Jacobs has been buying around these levels, in June and March of this year. Probably expecting the same rebound dynamics as when he joined the board back in 2016.

Valuation: 

Valuation is on the lower bound of the historical range and considerably lower than comps.

• EV per subscriber = ~$210, historically it has traded >$300, the norm being around $400. M&A has transacted >$300 and up to ~$3,000 for jewel assets (Fleetmatics back in 2016).
• MIXT is trading at an EV/sales around 1x, similar to CalAmp or PowerFleet which are both unprofitable businesses with lower gross margins (GM<50%). TRMB is a similar business from a margin/growth perspective but trades at 4x revenue and ~18x EBITDA. KARO, a South African comp, trades at 3.5x sales and >8x EBITDA. While not the most relevant comp, IOT (Samsara), the industry darling with unsustainably insane growth rates is trading at 14x EV/Revenue and is bleeding money (growth at all costs). Canadian Geotab acquired BSM in 2019 for about 2x sales whilst BSM was a considerably lower quality/subscale business that was barely breakeven. On a per sub basis = ~Cad$680.
• With ~$30M of EBITDA in the LTM, arguable at trough margins, MIXT is trading at ~5,5x LTM EBITDA. Again, arguably near trough multiple. I expect EBITDA to grow at an above-market rate over the next couple of years - making MIXT trade neat ~4x EBITDA using FY2025 expectations.

Overall, I think MIXT offers an above-market returns potential as it continues to grow. A modest low-double-digit subscriber/revenue growth and modest margin improvement should result in around +$50M of EBITDA in FY25 (implies EBITDA margins in the high 20%s, very achievable). Management's LT goals are EBIT margins of +20%, equating to mid-30% EBITDA margins. This is in line with MIXT's pre-covid margins.

If we are wrong about growth expectation, at the current EV of ~$170M, I think MIXT is a great bargain for a business that should in a steady state be able to generate ~$35-40m of free cash. As we have seen in ~FY21 when growth capex (hardware and installation) slowed down.

A combination of margin and multiple recoveries to normal levels could result in a more than 2x upside from current prices. 

Risks:

• about 50% of the business is exposed to South African Rand - somewhat balanced out since a majority of their cost are based in South Africa.
• some competitive risk from the likes of Samsara, and to a lesser extent Geotab, that have a low-priced entry-level offering which they use to grow aggressively. In Samsara's case, the IPO injected $850M of capital into the business, which they have been happy to burn to grow (irrational competition?). The key on the lower end is self-service and it seems Samsara has done a good job of offering a self-install solution - this isn't a competitive advantage per se but does give a temporary advantage.

Catalyst

• Oil & Gas customer rebounds.  Most of this should be growth without high capex (hardware/install expense) as they are turning on a service that was already in place. We are already seeing some recovery.  Similar to the incremental margin impact when the O&G business was a headwind, I expect the growth/recovery to come with extremely high margins and cash flows. 
• multiple rerating. A subscription business with ~30% returns on capital, high free cash generation, and a clean balance sheet, should not trade ~5x EBITDA for too long. If so, a buyback program could be an interesting use of capital.  Otherwise, MIXT would be a great acquisition target.