Description

MiX Telematics (MIXT) is a global provider of telematics solutions for vehicle fleet management and asset tracking.  MIXT offers an array of different solutions to help fleet managers monitor and improve vehicle and driver safety and security, increase fuel and vehicle efficiency, and comply with regulatory, safety, and other reporting requirements. MIXT has been written up twice previously on VIC, and I encourage anyone interested to review those reports for further depth of coverage.

Founded in South Africa in 1996, MIXT provides services to customers in over 120 countries through 17 regional offices and a network of over 130 fleet distribution partners worldwide. MIXT maintains offices in South Africa, the United Kingdom, the United States, Uganda, Brazil, Australia, Romania, Thailand, and the United Arab Emirates. MIXT has about 1,100 employees worldwide, with about 850 of these in South Africa, 71 in the U.S. and the rest scattered across the various regional offices.

MIXT maintains its headquarters in Midrand, South Africa, but CEO Stefan Joselowitz is based in MIXT’s U.S. office in Boca Raton, Florida.  The company is dual listed on the Johannesburg exchange in South Africa (ticker MIX) and has an ADR listed on the NYSE in the United States. As of its most recent fiscal year ending on March 31, 2021, MIXT’s diverse customer base included 4,800 fleet operators that comprised over 70% of the company’s FY2021 subscription revenue.  MIXT reported over 744,000 subscribers as of March 31, 2021. For the FY2021, MIXT recorded $126.9 million in total revenue, $113.4 million in subscription revenue, operating income of $18.2 million, and free cash flow of $29.9 million. (Notes: MIXT’s fiscal year ends on March 31; all dollar figures are USD; ZAR refers to the South African Rand).  At the recent price of $12 for the ADS, MIXT has an enterprise value of $227.5M.

To cover some company history, MIXT was originally named Matrix Vehicle Tracking at the time of its founding in 1996.  In 2007, MIXT acquired OmniBridge, a fleet management services business in South Africa that also served various international markets, and the company was renamed MiX Telematics in 2008 shortly after listing on the JSE.  In 2008, MIXT acquired Tripmaster, a US business, and Safe Drive, which operated two separate businesses in Australia and in the United Arab Emirates. In May 2012, MIXT acquired a South African transportation management software company called Intellichain. In August 2013, MIXT listed its ADS on the NYSE, raising additional capital at a very good valuation by selling stock at the price of $16 US per ADS. In December 2013, MIXT acquired another South African business called Roitech, which designed fleet management software for smartphones.  In November 2014, MIXT acquired Compass Fleet Management, a fleet management solutions business that was an active distributor of MIXT solutions to end customers.  The company has not announced a material acquisition since 2014. 

Modern telematics systems can be used to collect a vast amount of vehicle, customer, and driver data that can be used to measure and improve fleet performance.  Benefits include managing driver hours and performance, reduce fleet-wide repair, maintenance, and insurance costs, manage vehicle usage and security, and collect and analyze data for a wide variety of purposes, including business intelligence, compliance, and reporting. Global and multi-national companies are increasingly looking to consolidate their fleet management systems and data by moving to providers that have global reach and offer broad functionality.  MIXT’s telematics solutions are designed with the needs of vehicle fleet operators in mind. Fleet managers increasingly require timely and accurate data and real-time visibility into vehicle location, driver performance and safety, vehicle security, and operating costs.  Many of MIXT’s customers operate global fleets with vehicles in developing markets or in remote areas and conditions, where high crime rates and local driving conditions place a premium on vehicle monitoring and journey management. Finally, large fleet managers must navigate and comply with increasingly complicated and frequently changing regulatory requirements across different countries.

Mix offers proprietary, scalable technology to collect, analyze, and deliver data from vehicles to a web-based user interface. MIXT’s hardware and software allows clients to track their vehicles and mobile assets in real time, monitoring speed, location, engine performance, driver behavior, and fuel efficiency.  MIXT categorizes its’ customer base into three groups: premium fleet, light fleet, and asset tracking.  Premium fleet customers comprised 64% of FY2021 subscription revenue, while light fleet customers accounted for 20% and asset tracking contributed the final 16% of subscription sales.

MIXT offers a broad range of features for its fleet and mobile asset management customers.

For fleet customers, MIXT offers vehicle tracking and usage reports, fuel consumption and mileage analysis, compliance monitoring, hours of service tracking and fuel tax reporting.  Features focusing on driver improvement include in-vehicle video monitoring and real-time driver feedback, driver scoring and analysis, and crash notifications and vehicle theft recovery. MIXT offers a suite of over 110 standard reports and web-based business intelligence tools that provide fleet analytics, data visualization tools, and real-time data management. MIXT also provides mobile applications for either Android or Apple phones, as well as software development tools and apps to integrate MIXT’s data with the most common third-party ERP, route planning, or transportation management systems. MIXT delivers its software-as-a-service through a global infrastructure of third-party data centers and has historically maintained system uptime of over 99.5%. 

MIXT’s flagship large fleet software offering is the MiX Fleet Manager, and add-on subscription products include in-vehicle sound and video recording (MiX Vision), web-based fleet and office communication (MiX Rovi), in-cab driver feedback and assistance (Mix Ribas), and a suite of regulatory and driver hour monitoring tools (MiX Hours of Service).  MIXT has other add-on modules available as well, depending on the needs of the customer.  These products are targeted at customers that manage a fleet of 50 vehicles or more.

For mid-sized and smaller fleets, MIXT offers a simplified version of Fleet Manager designed to be easy to use and less complex, but still provides the most essential features of the flagship product. MIXT offers its Matrix system for very small fleets and even consumers to provide vehicle tracking and positioning, unauthorized use alerts, panic and crash alerts with emergency response, and other important features. Matrix is available both as an internet-based and mobile phone-based usage. MIXT has been working to penetrate the small-fleet space for several years, and the most recent product iteration for this segment is called MiX Now, an easy-to-use, self-installed system that allows business owners to receive notifications and information by mobile phone or PC.  MIXT has launched the product in the United States and looks to be evaluating how best to go to market with this offering. 

Finally, MIXT offers a portfolio of asset tracking products, some of which include third-party hardware and some of which MIXT developed internally.  These products are designed to allow business owners to track location and use for mobile assets such as portable generators, storage tanks and pumps, and trailers to track and improve utilization and reduce loss. In South Africa, MIXT offers a somewhat unique vehicle tracking service called Beam-e that leverages its large subscriber network to crowd-source the location of vehicles without the use of a traditional cellular network. Each Beam-e device communicates with other nearby devices to form a network that interfaces with MIXT’s tracking systems. This service is used by rental car companies, consumers, and owners of mobile business assets for tracking and recovery at a much lower cost when compared to a standard asset tracking device and subscription. MIXT has been evaluating the introduction of Beam-e in other developing markets and industry verticals. As of March 2021, MIXT managed over 566,000 mobile assets.

MIXT has historically been very successful with winning and retaining large fleet customers. As of March 2021, MIXT served over 4800 fleet operators. Among its 950 largest fleet customers, MIXT reports a retention rate of 94%, while for its very largest customers with 500 vehicles or more, the retention rate is 98% (these figures are both for fiscal 2021, which was obviously a very challenging year for many of MIXT’s fleet customers).  MIXT boasts a list of marquee corporate accounts such as Baker Hughes, Bechtel, BP, Chevron, DHL, Nestle, Pepsi, Halliburton, Schlumberger, Shell, Total, Weatherford, and Linde.  MIXT has historically been strongest in the industry verticals of global energy companies, transportation and logistics businesses, municipal public transport agencies, and bus and coach operators. Large fleet customers accounted for roughly 86% of fleet subs as of March 2021.  While MIXT doesn’t have an outsized exposure to any one customer (largest customer is ~7% of subscription revenue), the top 10 fleet customers have historically accounted for just shy of 25% of sales (though this declined to 21% in FY2021).  MIXT has a large exposure to oil and gas companies, but this exposure is not uniform around the world.   For example, MIXT’s U.S. business is nearly all energy, but globally energy customers represent only around 25% of total sales. In South Africa, MIXT has a substantial consumer business, and energy is a relatively small percentage of the industry exposure.

MIXT has been for several years transitioning from a sales model of selling the hardware up front with an attached monthly subscription to “bundling” the hardware and subscription together for one monthly subscription price. This effectively adds a leasing component to the sale to include the upfront cost of hardware manufacture, installation, and service into the monthly subscription rate. The “bundled” selling approach reduces MIXT’s cash flow during periods of growth (because MIXT is financing the hardware and installation) but is expected to improve MIXT’s ability to add subs and increase customer lifetime value.  MIXT’s subscription revenue was 89% of total revenue in FY2021, up from 85.7% in 2019.

Let’s talk a bit about typical customer deal economics.  Historically, MIXT has signed new customers (particularly large fleet customers) with an initial term that ranges from three to five years.  Some of these agreements come with automatic renewals unless the customer chooses to opt out, while others come up for renewal and are essentially re-signed for another renewal period (typically another three years).  Fleet contracts are generally non-cancellable prior to contract expiry, though in many countries (including South Africa) consumer and small business contracts can be cancelled in certain cases or situations by the customer without paying the full balance of the contract amount (i.e., just the amount of the service used).  Subscription revenue gross margins have generally been in the 75-77% range (the company bears the infrastructure costs of maintaining data centers, data, communications, dealer commissions and labor costs).  Hardware gross margins have historically been around 50-55% - MIXT doesn’t give the hardware element away.  Overall blended gross margins have recently been about 70% given the growing component of subscription revenue versus hardware sales.  The company averages about 9-11% of revenue for marketing and commission expenses, and another 7-10% for R&D. D&A averages roughly 13-15% of revenue; MIXT typically depreciates the full cost of the initial in-vehicle devices over the initial contract period for fleet customers (usually 3 or 5 years). Pre-tax income margins have historically been around 15-18%, while after-tax net income averages in the low double-digits and operating cash flow is usually in the low-to-mid 20% of sales range.   

Company management has consistently stated that the business should operate with an EBITDA margin of 30% or higher or so once at scale, and the company has in fact produced EBITDA margins at very close to that level for the past several years.  MIXT reports sales and adjusted EBITDA by geographic region, with a seventh business segment representing corporate overhead that MIXT refers to as the central services organization (CSO).  The CSO is assigned the costs for centralized software development, marketing, product management, support, and distribution for MIXT’s global operations.

In looking at the geographic breakdown by sales and EBITDA margin, Africa accounted for $67.9M in FY2021, or roughly 54% of total sales, and posted an adjusted EBITDA margin of 47%. The Middle East and Australasia region accounted for 16.7% of sales and 46% adjusted EBITDA margins. The Americas comprised 15% of sales but EBITDA margin was only 37%, while Europe accounted for just 11.5% of sales but an EBITDA margin of 43%.  The final region is Brazil, accounting for just 3% of sales but still posting 37% EBITDA margins. Once CSO and other costs are baked in, MIXT’s global consolidated adjusted EBITDA margins were 29% in FY2021.

MIXT has some impressive competitive strengths for a company of its small size and market value, starting with its profile as a truly global sales, distribution, and support system for its customers. To attract the multi-national companies such as the global energy giants that feature so prominently in MIXT’s list of major customers, MIXT’s global network of dealers and customer support infrastructure spanning North and South America, Europe, Africa and the Middle East, and extending to Australia represents a very strong competitive advantage.  MIXT now has a 25-year history of providing telematics services to global fleet operators, and this gives the company one of the more established market positions in the industry.  

MIXT also believes that its internal hardware and software design capabilities are a competitive advantage. MIXT typically designs its own hardware to ensure the in-vehicle devices are durable and can operate smoothly across MIXT’s various software and communications systems. MIXT believes its modular designs and control over the entire technology ecosystem removes the risks of relying on third-party, commodity in-vehicle devices and improves the ability to introduce new features, and results in more efficient customer service and response times. MIXT notes in its 2021 annual report that its “investment in software development is core to our business strategy” and that it has “routinely been among the first to market with innovative solutions and features that cater to the needs of our customers.”  MIXT has over 130 employees dedicated to hardware, software, and system development, most of whom are based in MIXT’s R&D center in Stellenbosch, SA. The company gets a lot of mileage out of the modest $7-9M per year in R&D and software development spend relative to MIXT’s product breadth and the cadence of new product extensions and updates.  On the other hand, MIXT hasn’t historically been aggressive in filing for patents, with only three significant patents mentioned in the annual report. 

MIXT utilizes the services of six third-party data centers located around the world, as well as cloud-based data storage using AWS and Azure. While MIXT designs its in-vehicle hardware, MIXT relies on third-party manufacturers for industry-standard components and to assemble the devices themselves. MIXT offers its services in over 120 countries, with 8 regional direct sales offices that target fleet operators in all major continents, augmented by over 130 accredited fleet dealers providing sales, customer support, and installation and training, with marketing and support services provided by MIXT’s regional offices. Finally, MIXT manages a network of distribution partners for small fleet and consumer customers, which includes auto dealers, auto parts retailers, and insurance companies, particularly in South Africa where its asset-tracking business maintains high market share. These distribution partners are paid commissions based on sales.

In its annual report, competitors mentioned include the global providers Trimble (TRMB), Omnitracs (owned by a private equity firm), and Samsara (IOT), but MIXT primarily competes with mid-sized, regional providers of telematics for vehicle fleets in the industry verticals it has traditionally targeted.  These include Geotab, a privately owned telematics company based in Ontaria, Canada, that appears to be roughly three times the size of MIXT, and Teletrac Navman, which is one of the business units of publicly traded Vontier (VNT) which is a 2020 spin-off from Fortive (FTV).  Smaller competitors include privately owned FMS-Tech in parts of Europe and the Middle East, Cartrack (publicly traded on the JSE) and Ctrack (owned by Inseego (INSG), the latter two of which are competitors in the South Africa market.

MIXT’s annual report cites a total addressable market size (as reported by ABI Research) of approximately 225 million commercial vehicles globally as of year-end 2020, the estimated market penetration for telematics systems in the global fleet is currently less than 20%.  This does not include the market for non-commercial vehicles, which is a market MIXT has managed to target with some success in South Africa but otherwise is a relatively untapped market.

Prior to MIXT’s fiscal year 2021 (which ended on March 31, 2021), the company had been a consistent grower for nearly its entire history. Going back to FY2014, subscribers grew each year: from ~451K in 2014 to ~512K in 2015 to ~566K in 2016 and all the way to 818,487 in 2020 before dropping back to 744,677 at year-end 2021.  MIXT now files a 10-K and reports results in USD using GAAP standards, however for years prior to FY2020 the company filed a 20-F and used IFRS accounting and mostly reported in Rand (ZAR).  After reporting $143.7M in total revenue in FY2019 and $145.65M for FY2020, total revenue fell to $126.9M in FY2021.  It is important to note that most of MIXT’s revenue comes in currencies other than the USD, so total revenue does fluctuate based on FX rates, particularly as it relates to ZAR. Profits aren’t as impacted as much by FX rates because many of MIXT’s costs are also denominated in ZAR and other non-US currencies, providing a partial natural currency hedge. 

In addition to being a solid grower for most of its history, MIXT has also been very consistently profitable, cash flow generative, and has a long track record of dividends as well as opportunistic share repurchases. OCF was $24.4M in FY2018, $31.5M in FY2019, $28.2M in FY2020, and then an impressive $38.6M in FY2021 (due to good expense and working capital management).  MIXT reports an adjusted EBITDA figure, which was $32.9M in FY2018, $41.5M in FY2019, $41.7M in FY2020, and $37.2M in FY2021. EBITDA margins have been just shy of 30% in each of past three fiscal years. This is a legitimately profitable business: GAAP pre-tax income has been between $16.5M and $24.6M in each of the past four fiscal years. 

MIXT’s growth was starting to slow even before the pandemic hit, largely due to the cyclical downturn in oil and gas prices, which caused MIXT’s energy customer base to cut back on the number of active vehicles in their fleets.  MIXT didn’t really lose any material fleet customers in the downturn, but they did lose subs due to inactive units.  But when the pandemic hit, it caused an outsized effect on MIXT’s customer base even outside of energy – now we are talking about customers that run tourist buses, livery services, rental car, taxi and driver companies, and tourism-related businesses. Again, this caused MIXT to lose subs due to vehicle inactivity, though MIXT was proactive about trying to help its customers through the pandemic by delaying subscription payments and making other concessions. MIXT employees were also impacted by needing to transition to work remotely for an extended period, with some continuing to do so.

The net result was that MIXT’s subscriber base shrunk in FY2021 to ~745K from the prior year-end high of just over 818K as of March 2020. One very impressive result of the pandemic for MIXT was the company’s demonstration of how cash generative the business is when not in growth mode; because the company wasn’t spending a lot of cash upfront to install in-vehicle devices for new subs, the capex dropped dramatically in FY2021, while the company’s efforts to improve working capital and reduce expenses freed up substantial cash.  As a result, despite a decline in reported total revenue in FY2021 of about $19M (which also reflected negative FX effects) to $126M from $145M the prior year, OCF jumped to $38.6M and FCF was $29.9M.  Thanks to all the FCF generation, MIXT ended March 2021 with a very strong balance sheet, with net cash of almost $44 million.

MIXT has seen improvement in the first two quarters of FY2022 (MIXT reported September 30, 2021, subs of over 770,000) with net subscriber adds in both quarters.  MIXT’s energy customers are benefitting from higher oil and natural gas prices in 2021, and some of MIXT’s other customers are rebounding from pandemic-shutdowns (though of course remain vulnerable to any decline in activity that might come from new shutdowns or reductions in business due to new COVID variants. MIXT reported 1H2022 revenue of $70.9M vs. $58.5M in 1H2021, operating income of $8M (versus $7M), but OCF has declined in 1H2021 to about $10M due to a large tax payment and a resumption in spending for growth.  I expect normalization of MIXT’s working capital and a resumption in growth spending to cause OCF and FCF in FY2022 (ending in March 2022) to be lower than normal after MIXT’s year of carefully conserving cash and building the balance sheet in FY2021. Beginning in FY2023, however, I expect MIXT’s growth to revert to historical ~10% top-line (constant FX) with OCF running in the $30M range and FCF ranging from $18-24M depending on how much MIXT is spending on in-vehicle devices for new customers.  Adjusted EBITDA is likely to be in the $38-42M range.

MIXT pays out dividends twice per year and has historically been very opportunistic with regards to share buybacks.  After having not repurchased shares during the pandemic, MIXT recently announced an increase to its buyback authorization of up to $10M; with the stock still languishing at still-low prices (the 52-week high for the stock was over $16 back in the summer of 2021) the stock remains cheap and therefore I am supportive of buybacks at these prices.

MIXT’s management and board have long histories with MIXT, own a lot of stock as a group, and have generally behaved like long-term oriented owner/operators. Stefan “Joss” Joselowitz is the founder and CEO of MIXT.  Joss relocated to the US in 2008 and lives in Boca Raton, where MIXT established what is now the company’s principal executive office.  Since becoming CEO of MIXT, Joss and MIXT have made six acquisitions, listed the company on the JSE in 2007, led the team that listed MIXT’s ADR on the NYSE in 2013, and continues to lead the company’s strategy and execution today.  Joss owns about 3.3% of the company shares.

Charles Tasker has been on the MIXT board since joining the company after the 2007 acquisition of OmniBridge, where Tasker led the fleet management business. Tasker has been the COO of MIXT since 2014 and owns about 0.8% of the company shares.

The non-executive Chairman of MIXT is Robin Frew, who has been in his current role since October of 2016, but who has been on the board of directors since MIXT was founded in 1996.  Frew’s background was as a founder of a mobile cellular service provider in South Africa, which was JSE-listed in 1997 and sold in 2001.  Frew now runs a private equity firm, and through his PE investment vehicle and personal holdings owned just over 15% of the shares as of May 2021.  

My observations about this management team are that they have appeared to act in a very rational manner, and they clearly understand that their roles are to increase the per-share intrinsic value of the business. They have not been afraid to buy back stock aggressively when opportunities have been there, and I think they have wanted to do acquisitions for many years but haven’t because their own stock has been cheap, and they couldn’t find anything at prices that made sense.  Back in 2016 and 2017, MIXT bought back almost 30% of the stock at exceptionally accretive prices but can go long stretches without buying back shares. Finally, while there is a stock and option granting program in place, it’s not like MIXT just issues stock or options every year like party favors: grants are typically tied to sales and profitability goals that represent true business improvement and aren’t trivial to achieve.

Joss has run the business not to appeal to growth-minded SaaS investors, but for a balance of growth and profitability, which I am completely fine with. Cash dividends are an important component of shareholder return at MIXT. Here is a quote from Joss from an investor call several years ago: “As you are aware, if you're an investor or been following our story, we do have the balanced approach to the way we run our business. I know this is frustrating to some of our U.S. investors, that we don't throw everything at top line growth. We have a balanced approach to the way we do it. We want to drive that top line and we continue to invest in doing that. But at the same time, we happen to really love profits as well, so we're very focused on our bottom line and ultimately on cash generation. So, we have an ethos in our business to constantly tweak things, to try and keep everything in balance and may not suit everybody. And bear in mind, our management team, globally, are incentivized on this balance.

Moving on to valuation, MIXT shares trade on both the JSE in ZAR, and can be bought in the U.S. with the ADS.  I will look at valuation through the lens of the American Depository Shares, which are much more convenient for U.S. investors since they are priced in dollars and trade on the NYSE.  Naturally, the two shares should trade in close tandem.  As of May 2021, MIXT had 605.5 million shares issued, including the shares represented by ADS. MIXT held 52.9 million shares in treasury, reducing the effective share count to 552.6 million.  Each ADS represents 25 shares of the JSE-listed common, such that there are 22.104 million ADS equivalent shares.

The ADS comes with some small expenses paid to the depository institution for providing the services of maintaining ADS shareholder lists, handling FX conversion and dividend payments to US holders, etc.  These expenses are generally taken out of ADS dividends. US investors also pay a 20% foreign tax withholding to South Africa. I expect FY2022 dividends of roughly 28 cents per US ADR, which is a dividend yield of about 2.3% or 1.8% after withholding. It is also worth noting that ADS holders don’t own MIXT shares directly, and ADS investors aren’t entitled to exercise shareholder rights as JSE holders would.  ADS shareholders are subject to New York jurisdiction for any legal complaints against the company.

At $12 per ADS, this would translate into a market cap of $265 million. As of Sept 30, 2021, MIXT had net cash of $37.7M on the balance sheet, so the EV is about $227.5 million.  For this price, investors are buying a global leader in fleet telematics services that has been a consistently growing, profitable, and cash flow generative business.  I expect revenues to recover to close to $145 million in FY2022, and MIXT should be able to produce adjusted EBITDA of $40 million+.  Normalized for working capital changes, MIXT has consistently produced $28-32 million in OCF.  Operating cash flow the past three fiscal years has been $31.5M, $28.2M, and $38.6M. FCF will vary depending on growth capex and spending on in-vehicle devices, both of which increase with subscriber adds.  On a mid-single digit growth trajectory, I’d estimate that normalized FCF would be in the $18-22 million range but should increase over time as the business scales. MIXT pays out $5-6 million in dividends (depending on FX rates) per year and has historically bought back shares at good prices from time to time. MIXT bought back $5.3M worth of shares in FY2019, $9.8M in FY2020, and none in FY2021.

To put valuation multiples on these figures, at $12 per ADS MIXT trades at less than 1.6X EV/Sales (using $145M), 7X OCF (using $32M), and 3.6X EBITDA (using $40M).  Regardless of which one of these multiples seems most appropriate to you, they all appear quite attractive for a business of this quality.  If you want to look at EV/subscriber, the company ended September with ~770K subs, so the EV/subscriber would be $295 per sub. About 560K of these are lower-value asset tracking subscribers, but the ~200K fleet subscribers which average about $550 per year in subscription revenue at 95%+ retention rates should be worth quite a bit.

On a relative basis, MIXT is very cheap compared to the large publicly traded telematics companies.  Trimble is the largest of the public telematics companies that I could identify, and it trades for 7.2X sales and 29X EV/EBITDA, though is a much bigger and better business. Samsara (IOT) sells for 20X sales and isn’t profitable, though is growing revenues very quickly and isn’t a pure-play fleet telematics business. Teletrac Navman’s parent company Vontier trades cheaply on the multiples (EV/Sales of 2.7X and EV/EBITDA of 10.5) but isn’t a pure-play telematics company and has a ton of debt.  Ituron Location and Control (ITRN) also trades at a reasonable valuation but is quite different from MIXT in that it is primarily a consumer business heavily concentrated in Israel and Brazil. Smaller telematics businesses and GPS-based navigation businesses such as TomTom (acquired by Bridgestone Europe for $1 billion back 2019) don’t seem to stay public for long – they get snapped up by acquirers at very hefty control premiums.

As an acquisition candidate, I think MIXT’s global footprint and customer base and productive, low-cost software and hardware design capabilities would be very attractive for any number of larger companies in this space. MIXT has a great niche in large, international fleet customers, with high retention rates.  Also, the Beam-e tracking technology that MIXT has successfully deployed in South Africa seems like it has some promise in other markets.  Also, the scope for immediate cost synergies looks quite wide for a larger acquirer. There are public listing expenses for two exchanges that would be eliminated, board of directors and management compensation would be reduced dramatically, there are regional offices that could be consolidated, purchasing synergies, etc.  I could see an acquirer being willing to pay a surprising premium to today’s price for MIXT.    

MIXT’s valuation clearly would make zero sense if this were a U.S. company. Of course, one of the likely explanations for the attractive valuation for MIXT is that investors assign an emerging market discount to the company due to the South Africa domicile. Unfortunately, 2021 has not been a good year for “South Africa country risk” as there was civil unrest in the summer and then the Omicron variant in November, which was first identified in South Africa. South Africa often feels like a hybrid between a developed and developing market. South Africa has higher rates of unemployment and crime than the US, for example, but given that MIXT sells products designed to protect assets against theft and to improve recovery of those assets, I’m not sure this is a major risk to MIXT.

The FX risk is something that needs consideration; the ZAR has consistently weakened over time versus the U.S. dollar and represents something of a continual headwind in terms of USD-denominated revenue growth. On the other hand, profit impact is not nearly as high because MIXT has a significant portion of its expenses denominated in ZAR.  Also, MIXT holds a lot of cash outside of South Africa (mostly in the US and Europe), so the FX risk mostly hits MIXT on the top line and not the bottom line or in the value of its balance sheet. Investors would likely be hurt in the case of a Venezuela-style sudden currency collapse but aren’t really hurt by consistent devaluation of the ZAR.  

I’m not sure what the appropriate valuation discount would be to properly bake in the country or “emerging market” risk here, but I think that over time the company will become less South Africa-centric. MIXT management has made it clear that their longer-term aspiration is to be viewed as a global business with a single U.S. stock market listing and less exposure to any single market. To the extent that MIXT is successful in diversifying some of its key infrastructure, it should be able to further insulate itself from local political and currency risk. MIXT is now a fully US-GAAP compliant reporting company, and I believe they are looking for ways to grow the business more aggressively outside South Africa.  

Other potentials risks are MIXT’s historical use of one key global supplier to provide GSM module components for its hardware, and its reliance on two South African contract manufacturers to assemble the hardware.  Note that the two hardware manufacturers make different products for MIXT and therefore are not interchangeable.  MIXT has stated in the past that any major event that caused inability of one or more of these suppliers and manufacturers to provide MIXT with inventory, it could take as much as 3 to 5 months to replace production capacity. Also, many of the components for the hardware are made in China, and availability could be an issue given the supply chain issues related to the pandemic and potential political disputes. Finally, MIXT relies on cellular network providers in all its markets to transmit data from customer assets to its data centers.  Some of these network relationships involve the use of carrier-specific SIM cards that are compatible with that provider, and as such if there were a relationship issue MIXT would need to replace the SIM cards to any replacement provider at its own cost.  My sense is that is a contractually limited risk and while any such incident would be inconvenient, it wouldn’t be any kind of existential threat.  MIXT also uses GPS technology as a backup to or in place of cellular signals in some products, and in this case MIXT benefits from the US government’s policy of not charging for the signals sent by its satellites.

There are regulations and regulatory risk everywhere MIXT does business. South Africa has some very specific regulations related to improving equality of economic participation, while there are data security laws that vary in their complexity and ease of compliance throughout the world.  There are a couple of specific current risks mentioned in the FY2021 annual report.  One is a dispute with the Ugandan tax authorities related to value-added taxes (VAT) that Uganda has asserted that MIXT owes; MIXT has challenged the Ugandan tax authorities and continues to defend its practices.  My suspicion is that this is not a material risk and will eventually likely be settled.

Another risk is an anti-competition action taken against MIXT by the Competition Commission of South Africa, which appears to be accusing MIXT of dividing up the market territories of its distribution partners in the country, which is a common business practice in most places.  I am pretty sure that having distributors with exclusive territory rights isn’t non-competitive behavior in most places, so long as MIXT isn’t colluding with its true competitors in asset tracking or telematics, which is apparently not the issue here. I expect this issue will eventually be resolved without material harm to MIXT.

There is also one disclosed patent litigation, where MIXT is being sued in the U.S. for patent infringement by a company called PerDiem that alleges MIXT’s “ELD and geo-fencing” products infringe ten different patents. I have no idea as to the validity of this case.

Fully autonomous vehicles and driverless trucks is a longer-term risk.  My sense for now is that this will only become a concern about 10-15 years out, particularly in some of the less developed markets.  Also, while some of MIXT’s current products that are designed to improve driver safety and compliance won’t be needed in a fully automated world, I can’t imagine a world of fully automated trucks and fleet vehicles that don’t need far more remote monitoring and control than what is available now. Clearly, the asset tracking and security functions will be more important than they are now.  As of now, I can only say that I am confident that MIXT will have an opportunity to be a part of any future autonomous fleet solution and will position itself to take advantage of the industry disruption rather than be disrupted. 

One of the reasons I am attracted to MIXT as an investment is that I feel that there is a significant runway for this business, and that it can be a lot bigger in ten years than it is today. The value proposition for MIXT’s products seems very strong. MIXT solutions increase fleet safety, as most customers report a significant reduction in accidents and improvements in driver behavior after adopting the software. Efficiency is another natural benefit, with a reduction in fuel costs being a near-guaranteed result for any customer who implements a fleet tracking system. MIXT reports that its customers report a very strong ROI on their purchase in the form of savings across their fleets that show up in a lot of different ways. Security is another important selling point – and the primary selling point for some of MIXT’s asset tracking products - but is also a very important side benefit for customers who are buying fleet tracking systems for other reasons.  Finally, there is compliance, which is an issue for most businesses that operate large trucks or have large vehicle fleets.  Even better, MIXT’s retention rates are strongest amongst its most valuable customers, the very large fleet users. Customer retention rates for MIXT’s premium fleet business has been in the 95-98% range historically, and over 70% of MIXT’s revenues come from large fleet customers. 

Overall, I think that there is just a lot of business value available for an investor at today’s price of $12 for the ADS.  I also think MIXT’s business will look much better if (when?) the pandemic finally passes or at least the industry verticals served by MIXT that have been hardest hit (tourism, transportation, etc.) recover to something close to normal. I also think that MIXT would make an excellent acquisition for any number of companies, although I don’t expect this to happen for a couple of years. In the meantime, I expect MIXT to continue to grow revenues at a decent clip, generate solid profits and cash flow, and pay modest dividends. I also expect MIXT to use its $10M share buyback authorization to reduce the share count by 3-4% in calendar 2022, and the company could easily re-load and do the same next year.  

Catalyst

• Pandemic finally passes and MIXT's customer base recovers to normal levels of activity

  • MIXT resumes share buybacks using current $10M authorization

  • Acquisition at a sizable control premium always a possibility