With The Finance Ghost, my goal is to focus on the fundamental principles of investing rather than the concepts used by traders in looking for market patterns and signals.

The art of fundamental investing requires you to consider company variables including:

  • Core company strategy
  • Growth prospects across existing and potential future markets
  • Revenue and customer volume growth
  • Key margins (gross profit and operating profit or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation))
  • Cash flow conversion
  • Balance sheet strength
  • Shareholder profile (balancing act between strong anchor shareholders and enough free float to achieve liquidity i.e. shares held by the general public that are frequently traded)

There’s a R14bn market cap company on the JSE that deserves your attention: Cartrack.

Since the lowest point in March, the share price is up 168%. This month alone, the share price is up 27%. Since the start of the year, Cartrack is up 88%. That’s an incredible performance to say the least.

B2B, B2C and SAAS – what does it all mean?

In explaining why I think Cartrack is so great, let’s do some jargon-busting.

B2B stands for business-to-business and describes a business model where a company provides goods or services to other businesses.

B2C stands for business-to-consumer and reflects a model of providing goods or services directly to end-user consumers (often called retail customers).

SAAS stands for software-as-a-service, which technically means cloud-based services where customers access the software applications via internet browsers. The wonderful thing with a SAAS model is that companies burn cash in the beginning to develop the software, but can generate incredible cash flows later-on once the software is established and user numbers start ticking up.

This cash burn phase is why the world of venture capital exists. Entrepreneurs with great ideas need money to get them through the development phase.

But what does all of this have to do with Cartrack?

Cartrack’s operating model is brilliant

Firstly, Cartrack has inherent diversification because the company operates a B2B model (fleet management and asset recovery) and a B2C model (asset recovery). The same underlying software can be applied in two entirely different markets with different fundamentals and risks.

The strength of the model is evidenced by the performance over lockdown, with revenue up 19% in the latest interim results.

Cartrack’s subscriber churn over lockdown was consistent with prior periods. In the B2C space, Cartrack’s devices are installed evenly between new and used vehicles, so a drop in car sales doesn’t really hurt the company.

For as long as good citizens are driving their cars or operating fleets and bad citizens are targeting them for crime, Cartrack has a business. It goes beyond that, as fleet management services are critical in the logistics industry.

Secondly, Cartrack’s SAAS model means that the company’s operating margins are ridiculous. Here’s a chart of regional performance in the latest interim results:

 

The purple bars represent revenue in each region in millions of Rands. The green bars represent EBITDA, also in millions of Rands. The blue line is revenue growth, showing that South Africa’s growth rate of 17% looks strong in isolation, but pales in comparison to the exceptional rates in Asia Pacific and Europe.

The light orange oval represents EBITDA margin in each region. To be clear: these margins are enormous. It’s rare to come across a business model generating margins like this.

So not only has Cartrack successfully expanded way beyond its South African roots (now operating in 23 countries), but it has managed to do so in a highly profitable and organic nature. This is a far cry from most South African management teams that chase offshore acquisitions in the hope that they work out. Cartrack has followed a founder-led strategy where the CEO now lives in Singapore, actively growing the business in that region and focusing on technological advancement.

A dependable generator of cash

With nearly 1.2 million subscribers, Cartrack has a diverse revenue base. Best of all, the revenue model is based on subscriptions, which is the most powerful SAAS model of them all (used by the likes of Adobe internationally).

98% of Cartrack’s revenue is subscription-based. That’s phenomenal.

The group operates a capital-light model with the major capex requirement being the fitting of telematics devices. Cartrack has little to no debt on the balance sheet, so financial risk for shareholders is low. There’s not much that gets in the way between operating profit and free cash flow to shareholders.

With interim revenue of just under R1.1bn, Cartrack generated nearly R470m in operating cash. That’s around a 43% cash conversion rate. For every Rand generated in revenue, Cartrack has 43 cents available for further investment or to pay to shareholders.

Free cash flow grew 36% over the lockdown period and the Group has R232m in cash. It also has access to a currently untapped R600m medium term facility from RMB.

It’s therefore understandable why the company has declared a dividend of 87 cents per share, more than 4 times higher than the interim dividend last year of 20 cents per share. Even after the share price jump this month and with the assumption that the interim dividend will be repeated at year end, Cartrack is trading on a juicy 3.7% dividend yield.

What might the future hold?

Only 29% of the group’s revenue is currently generated outside of South Africa’s borders. The offshore businesses are growing quickly and obviously bring Rand hedge benefits, so Cartrack offers investors access to a truly global market.

Underpinning this is the potential for further market penetration in South Africa. Subscriber growth in South Africa was 13% even over the lockdown period. Cartrack’s core is so strong and provides the perfect base for ongoing global expansion.

From a product perspective, Cartrack has introduced value-added services like insurance and cost accounting solutions in the B2B space. This could drive margins even higher in future.

Long-term, it’s not difficult to imagine a world where Cartrack lists internationally.

In 2016, Verizon Communications acquired Fleetmatics Group Plc and delisted it. Fleetmatics is a SAAS fleet management company that had 37,000 customers at the time of the transaction. Verizon paid $2.4bn for the company. The company generated $285m in the year before the deal, suggesting a 8.5x revenue multiple.

Cartrack is currently trading at a P/E (Price / Earnings) multiple of 27x which is steep by South African standards but not expensive by global technology standards. The forward revenue multiple of 6.7x compares favourably to the Fleetmatics deal a few years ago.

The former CEO of Fleetmatics has raised $115m in a SPAC listing on the Nasdaq, tapping into the latest trend in the US to reverse list companies into SPACs as an easier regulatory path to come to market. It’s not an entirely happy story, as the company offered $15m less than anticipated, but it still demonstrates public market interest in this industry.

However, there’s a potential spanner in the works: Cartrack is trading under cautionary.

The company issued a cautionary announcement on 8th September that the company has “entered into negotiations and exploring options with its major shareholder, Karoo Pte Ltd, which, if successfully concluded, may result in the restructuring of the Cartrack group.”

Karoo Pte Ltd is the Singaporean holding company linked to founder and CEO, Zak Calisto. Is he thinking of taking the company private? Or is there some other capital markets transaction being planned that might include an offshore listing?

It would be a real pity if the company is taken private and investors aren’t able to be part of this growth story going forward. In my opinion, it ticks almost every box as a great investment. The only major issue is a lack of liquidity, with nearly 80% of the shares in issue held by entities linked to directors.

We will have to see how it all plays out, but I’m seriously considering taking a position in Cartrack this week. It’s rare to see a company with underlying fundamentals like this.

 

2 CommentsClose Comments

2 Comments

  • Papaki Legodi
    Posted Oct 19, 2020 at 7:41 am 0Likes

    Thanks for a wonderful article.

    I believe its important that you stress test the observation that Cartrack has a capital light model. One way to do this would be to sum up the yearly capital expenditure for the past 5 years and compare it against the corresponding increase in net equity (assets more tangible) and profit/revenue/subscriber growth.

    Once you do the analysis you will realise that customer churn is the company’s biggest problem. As a result the company has to spend a bulk of its cash inflow each year to replace “lost” customers. Unfortunately the company does not disclose customer churn figures but I estimate that more than 50% the capital expenditure is spent on replacing lost revenue.

    • Posted Oct 19, 2020 at 6:16 pm 0Likes

      Hi Papaki, thanks for the comment! Agreed, there’s significant customer churn in something like this. It’s rare to see a company that needs to spend capex in such a focused manner i.e. on a single, core area. Overall, it’s still a really cash generative company with an incredibly good free cash flow conversion rate.

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