Description
We believe PowerFleet (PWFL) is a compelling long investment, with greater than 200% upside over the next several years. The company, a product of a 2019 merger between I.D. Systems and Pointer Telocation, is a leading provider of IoT software and solutions to the industrial, logistics, and commercial vehicle industries. PWFL’s offerings include hardware that captures data (e.g., location, speed, weight/load, temperature) and, more importantly, software that analyzes and interprets that data enabling customers to increase efficiency, improve safety and security, and reduce costs.
Key attributes of PWFL include:
Ø 60% of its revenue base is recurring high-margin software. Contracts are typically 48 months or more in length.
Ø Strong secular tailwinds should drive 15%+ annual end-market growth for years to come.
Ø “Who’s Who” customer list – e.g., Walmart, UPS, Walgreens, Proctor & Gamble, and Amazon.
Ø Geographic reach and broad product portfolio to win large global tenders. Management estimates PWLF’s win rate is 65% when head-to-head on a blended basis across end markets.
Ø “Switzerland” of fleet management as their offering is manufacturer agnostic as opposed to OEM-tied competitors. Thus, in mixed fleet environments, PWFL’s competitive advantage grows.
Ø High-quality management team. We have had multiple interactions with PWFL’s senior management and have come away impressed each time. The CEO, Chris Wolfe, is an industry veteran with 20+ years of experience.
Ø Strong sponsor with industry experience in Abry Partners. Abry invested $50mm in a convert with a strike of $7.319 (>30% above the $5.54 recent close) at the time of the I.D. Systems/Pointer merger. Having Abry representatives on the Board will ensure the company remains laser-focused on growing shareholder value.
Ø Low capex needs and low tax rate create a compelling free cash flow machine, particularly as the business grows and leverages its fixed cost structure. We project annual capex needs of just low single-digit millions.
Ø Powerful margin expansion going forward. The combination of (a) an increasing proportion of revenue derived from high-margin software sales, (b) operating leverage on fixed costs, and (c) cost synergies flowing from the merger should enable EBITDA margin growth from the low double-digits percent to the mid-20s percent. Management’s target model achieves a 25% EBITDA margin at $200mm of revenues.
Projections and Price Target:
Ø Post the 2020 Covid speed bump, we model revenues to grow at a low-to-mid double-digit percentage rate for the next several years.
Ø At the same time, we expect the EBITDA margin to expand 300-500bps per year.
Ø The net result is we project roughly $50mm of EBITDA in 2024. Note – management has previously targeted $50mm of EBITDA in 2023, but we think Covid likely results in a push to the right for that goal.
Ø The FCF yield at that point based on the current stock price would be approaching 20%.
Ø For a business with PWFL’s key characteristics – substantial recurring revenue + secular end-market growth + low capital needs – we think a 10x EBITDA multiple is conservative; something like 12x may be more likely.
Ø 10x yields a $17 target in three years; 12x produces more than a $20 share price. These targets yield 200-270% upside to the current price.
Ø We also note that M&A in the space has often transpired at mid-teens multiples. No doubt, Abry will consider a strategic exit option when the time is right.
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This posting is solely for the evaluation of club members and is not a recommendation to buy or sell this stock. The views expressed are those of the author individually and should not be attributed to any affiliated investment firm, which may or may not hold positions consistent with the views expressed herein and may buy or sell shares at any time.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Customer win announcements
Margin expansion
Takeout