Description

MIXT

Leading provider of telematics in midst of business model transition. Near term depressed cash flow masks stable, high margin, recurring business model with low double digit organic growth. Nearly 50% upside with several catalysts to drive share price appreciation.

Company Description

MiX Telematics (“MIXT” or the “Company”) is a leading global provider of fleet and mobile asset management solutions delivered as Software-as-a-Service (“SaaS”) to customers in approximately 120 countries, managing over 566,000 mobile assets. The Company’s products and services provide enterprise fleets, small fleets and consumers with solutions for safety, efficiency, risk management and security. MiX’s proprietary, highly scalable technology platform enables the collection, analysis and delivery of data from vehicles, presented on an intuitive, web-based interface. Headquartered in Midrand, South Africa with the CEO and U.S. based office in Boca Raton, FL.

Company Overview

MIXT’s hardware and software allows clients to track their vehicles and mobile assets in real time, monitoring not only location, but speed, engine temperature, driver alertness, braking patterns and a myriad of other “events” related to asset performance, quality, safety and security. Customers subscribe to the service monthly per-vehicle installed. Over the past several years the Company has transitioned the subscriptions into “bundled” deals, which includes the cost of the device and the SaaS.   Previously, the company sold hardware and the SaaS separately. While bundling requires MIXT to spend more up front, the higher monthly fee leads to higher margins over the long term.

Customers fall into 3 buckets: Premium Fleet, Light Fleet and Asset Tracking

Premium Fleet

MIXT’s flagship offering allows clients to access an extensive suite of reports along with the tracking vehicle location and monitoring driver behavior (aggressive braking, speeding etc.). This information allows MIXT to create a “scorecard” to evaluate drivers and resolve issue quickly. The system can also push notifications and behavioral suggestions to the driver, preventing accidents. Fleet managers can see what’s happening across their fleet in real time and run more efficiently by optimizing the number of hours their drivers are on the road and monitoring how long they site “idle”, wasting gas. In addition, installing MIXT’s system reduces insurance rates and makes auditing of accidents far easier as “events” are recorded, reducing legal costs. The service has an API that integrates within client ERP systems.

Light Fleet

Light fleet subscribers are mainly based in South Africa and are part of MIXT’s Matrix brand. A less sophisticated version of MIXT’s premium fleet offering, Matrix allows clients to track a vehicle and monitor activity such as crossing a country boarder, operating during off-hours or crashing. This service lowers insurance premiums for owners.

Asset Tracking

MIXT’s asset tracking customers are primarily consumers using its “Beame” [pronounced BE-ME] product. Beame is a small device which allows the tracking of a vehicle or object’s location. Primarily used to find a vehicle in the event of theft, users get discounts on their insurance premiums by installing the device. While this segment has lower ARPU, commercial clients incorporate these devices to track less sophisticated assets like shipping containers and “Port-O-Pottys”, providing incremental revenue and margin. While growing rapidly in South Africa, MIXT plans to introduce Beame to the Americas over the next year.

Geographic Breakdown

*Denominator excludes CSO & Corporate.

† Adj. EBITDA: profit before income taxes, net finance income/(costs), FX gains/(losses), D&A, share-based compensation, transaction costs from the acquisitions or review of strategic alternatives, restructuring costs, profits/(losses) on sale/impairment of assets, non-recurring (“IPO”) costs and insurance reimbursements.

MIXT was founded in South Africa, and that remains its biggest market. Recent weakness in the U.S. oil and gas sector has suppressed both sales and margins in the Americas, but with stabilization, MIXT expects to grow with this sector over the next several years. While some of its prominent O&G clients, like Schlumberger, have temporarily reduced their active fleet sizes, MIXT has not lost one customer.  O&G represented 19% of revenue in the most recent quarter, the second biggest vertical after consumer.

During their September Analyst Day, the CFO commented, “Africa, by far, is our greatest and most material region and has 40% adjusted EBITDA margins. Over time, we expect the other regions to be able to reach those levels as they scale out. We've already invested in our management layers in all of those regions, and it's really just a matter of growing the base in those regions without necessarily having to invest further in management structures.”

Investment Thesis

• MiXT Telematics’ focus on large, multinational fleets has created a highly valuable and scalable platform; growth will come from continued penetration of existing customers as well as new customers in less penetrated markets (Americas).

• Current revenue and margins are relatively depressed. As the Company transitions to subscription model, initial hardware investments will pay dividends over time through higher recurring service fees. As an aside, if MIXT had maintained the same share of Bundled/vs non-bundled in 2016 as it had at the end of 2015, net revenues (Hardware and Software) would have been 33.63M ZAR ($2.27M) higher in 2016 or an 8% revenue growth rate vs. 5.4% actual growth.

• MIXT boasts an over 95% retention rate among its premium fleet customers (62% of revenue). With limited incremental support costs, such clients provide stable, highly leverage-able cash flow.

• Americas has yet to scale. Over time Americas EBITDA margin should be comparable to the margins of the African business.

• Secular growth in demand for Telematics services as clients 1) demand better data to control costs and limit liability and 2) deal with near term regulatory mandates from the Federal Motor Carrier Safety Administration (FMCSA).

• Analysis of fleet performance is critical for fleet operators. Be it limiting wasted fuel, reducing inventory slippage, or limiting labor costs, telematics services save fleet operators a lot of money. Industry reports suggest clients see a 5:1-7:1 return on investment.

• The FMCSA has proposed regulations which would require the gradual implementation of ELD (Electronic Logging device) technology in all commercial vehicles over 10,000lbs by 2019. This technology will enable fleets to ensure that their drivers are not logging more hours on the road then deemed safe. Starting in December 2017 all commercial vehicles will be required to have AOBRD (Automatic On-Board Recording Device, 1980’s technology) or ELDs (Electronic Logging device) installed, with a full transition to ELD by December 2019. The current installed base of ELD within commercial vehicles in the U.S. is 1 million, with 2.1 million vehicles still needing these devices. MIXT’s Premium Fleet offering is an ELD-compliant service and this “once in a lifetime” boost to demand will allow MIXT to greatly increase its US installed base, leading to high-margin recurring subscription revenue.

• New technology platform enables MIXT to scale far more quickly.

• In 2013, MIXT began building a new software platform called DynaMiX. On the front end MiX Fleet Manager replaces their legacy premium fleet software.  Using a modular architecture, the Company has layered on new features like journey management, hours of service, My MiX, MiX Go and many more. At the same time MIXT replaced its legacy back-end infrastructure and database technology with a product called “MiX Lightning” and moved their servers to the “cloud”.  While over 90% of MIXT’s clients are on this platform, all clients will be on the new platform by year end. Presumably the increased spend on such a large R&D initiative has depressed margins over the past few years.

• The new platform should allow the Company to acquire and integrate smaller companies, particularly in North America where it continues to evaluate opportunities.

Near Term Catalysts

• ELD: The near term demand for ELD services as FMCSA regulations come into effect will be a boon for fleet management software.

• Business Model Transition: As the company begins to lap its initial business model transition, switching to bundled deals, the incrementally higher margin recurring SAAS rev will lap the reduced hardware revenue.

• O&G stabilizing: O&G has already begun to stabilize, and these clients will again start rolling out more vehicles as the market reaches equilibrium. As the company laps the slowdown in O&G, comps will get much more favorable.

• Improved disclosure at the sector and sub level: As the result (at least in part) of persuasion by investors, the company has increased its segment and geographic level disclosure. This new information makes the company easier to analyze, and attracts new shareholders on the margin.

Longer Term Value Drivers

• CEO Stefan Joselowitz (Joss) is a smart capital allocator and understands the long term value of MIXT. He has commented that MIXT regularly receives offers at “40%-50%” above the current share price, yet thinks such offers undervalue the Company. Since the NYSE IPO at $16, the company had used $5M of cash to acquire a small company (Compass), $9M to purchase 5% of its stock in the public market, and in April 2016, MIXT’s largest shareholder, Imperial, sold back its 25% stake to the Company, with the Company purchasing the shares for $33.4M, or $4.16 per ADR equivalent. These shares have been canceled as of August 31st. This was immediately accretive to remaining shareholders.

• Private Equity: Company is unlevered. With high margin recurring revenues, it would be an attractive target for a private equity buyer.  The recent reduction of the Company’s float through substantial repurchases has made the Company incrementally more actionable.

• Strategic Acquirer: M&A activity has been strong in the space, with Verizon’s purchasing of Fleetmatics (August 2016 for $2.4bn) and Telogis (July 2016, estimated $1bn). While MIXT is smaller than Fleetmatics, any one of a number of potential telecom or logistics companies could acquire MIXT and leverage its technology and customer base.

Risks/ Mitigants

• Competition: The fleet management market is highly competitive. However, few companies have the global footprint and are equipped to handle large multinational clients (over 500 vehicles) as well as MIXT.

• Technological disintermediation from new, cheaper devices: MIXT has commented that OEMs may eventually include tracking hardware in their vehicles. However most fleets have multiple OEMs and will want to have a hardware agnostic solution. At the same time MIXT is already giving the hardware away as part of its bundled offering.  Furthermore, a MIXT subscription makes up a tiny portion of client’s expenses on a per-vehicle basis and the ROI (5:1-7:1) is compelling. Switching costs are non-trivial for onboarding an entirely new product. MIXT’s service track record and high retention rates speak to this point.

• Weakness in energy clients leading to utilization declines: When oil prices fell dramatically in 2015, MIXT’s O&G clients (22%) cut back on fleet size, reducing the number of vehicles deployed. While oil and gas has stabilized, a further downturn would be a headwind to growth. The company is actively expanding into other verticals to provide cushion from future cyclical swings.

• S. Africa exposure –geographic concentration, FX risk for US investors

Valuation and Price Target

Comparable Transaction

The closest comparable transaction for MIXT is Verizon’s acquisition of Fleetmatics(FLTX). Using this as benchmark, we’ve broken down what VZ paid for FLTX, per subscriber. The majority of FLTX’s subscribers are SMB’s based in North America in comparison to the 62% of MIXT’s revenue which comes from clients who have fleets of at least 500 vehicles (“Premium Fleet”). Without knowledge of the detailed EBITDA contribution of each type of subscriber, we’ve compared the ARPU of FLTX’s customers to that of MIXT’s and backed into an adjusted value per subscriber. In this analysis we’ve not ascribed any value to MIXT’s consumer business (Asset Tracking).  Under this scenario MIXT is worth over $22 a share, more than 200% above the current share price of $6.10.

Comparable trading Multiple

Pick your favorite multiple for an unlevered SaaS business with retention rates over 95% that has exhibited double digit growth.  Below are handful of more telematics-related comps.  Regardless, a 10X EV/EBITDA seems reasonable. (FLTX is not included in the COMP analysis as it is trading with an acquisition premium. Before the deal, FLTX was trading at 5.2X LTM Revenue and 22X LTM EBITDA)  

We’ve made an adjustment to depreciation to reflect the portion of the CAPEX spend related to “Bundled” deals, as that CAPEX is essentially an operating expense (COGS). In speaking with management, the estimated useful life of MIXT’s in-vehicle devices is 6.5 years.  We’ve subtracted this expense from our Pro-Forma EBITDA calculation.

Catalyst

·         ELD: The near term demand for ELD services as FMCSA regulations come into effect will be a boon for fleet management software.

·         Business Model Transition: As the company begins to lap its initial business model transition, switching to bundled deals, the incrementally higher margin recurring SAAS rev will lap the reduced hardware revenue.

·         O&G stabilizing: O&G has already begun to stabilize, and these clients will again start rolling out more vehicles as the market reaches equilibrium. As the company laps the slowdown in O&G, comps will get much more favorable.

·         Improved disclosure at the sector and sub level: As the result (at least in part) of persuasion by investors, the company has increased its segment and geographic level disclosure. This new information makes the company easier to analyze, and attracts new shareholders on the margin.