Cartrack: the Americans give us a value
- Global, South Africa
- Cartrack, Circular, Karooooo, Nasdaq, Prospectus, Scheme of arrangement
- April 6, 2021
Corporate actions aren’t always easy to understand. Some are fairly straightforward (e.g. Company A is buying Company B) and others are horrendously complicated (like Cartrack’s big move to the Nasdaq).
I first wrote about Cartrack on October 18th, 2020. At the time, it was trading at around R45 per share. Cartrack isn’t a company I had paid much attention to before, but after reading their financials I was seriously impressed. I bought shares with an average in-price of R45.49 per share. Subsequent to that, I wrote again on 7th January 2021 when more details became available on the deal.
At the time of the first article, the company was trading under cautionary. I speculated that there were two potential outcomes:
- An international listing; or
- A take-private offer by the CEO
I was on the money with the international listing thesis. Cartrack is on a global growth path and that means it should be taken closer to the investors who will understand and support that.
In a world of perfectly efficient markets, it shouldn’t matter where a company is listed. Investors will find the companies and invest regardless of where they are, valuing the underlying operations accordingly.
Unfortunately (or fortunately?) the markets are anything but efficient. The choice of listing destination matters. If you are taking a software-as-a-service (SAAS) company to market with a strong tech flavour and global growth prospects, the JSE isn’t the right place. The Nasdaq is.
Hence, Cartrack is using its passport and moving overseas.
Why do I like Cartrack financially?
There are five reasons why I like Cartrack:
- Revenue growth is high, including in South Africa as the home market
- EBITDA margin (i.e. operating profit margin) is extremely high
- Nearly all of Cartrack’s revenue is subscription-based
- Cash conversion is strong and the company pays great dividends
- Cartrack has demonstrated an ability to grow internationally and is taking the right steps to focus on delivering that growth
If you want to read a mega deep dive into the company, check out Jordan Nel’s opus on the subject here: https://vineyardholdings.net/2021/01/24/cartrack-2/
How does the offshore listing work?
Cartrack shareholders are going to be bought out by the company at R42 per share. This means I will realise a loss on my shares, as will anyone else who bought above R42.
The important point is that there is a reinvestment option available to buy shares in the new offshore entity. The share price of Cartrack on the JSE reflects the way investors are feeling about the international prospects, not the fact that an offer will be made at R42.
We now need to touch on the extremely complicated transaction documents along the way. I am not giving financial advice here and cannot tell you what to do as a Cartrack shareholder. All I am doing is pointing you towards the relevant documents and giving explanations of key principles.
With 96 glorious pages, Cartrack Holdings LTD and the new international company Karooooo PTE. LTD released a combined circular to shareholders on 19th January. That’s a long time ago, but these deals take time to implement.
Circulars are detailed documents addressed to shareholders which set out the key terms of transactions. They include timetables for the deal, key actions to be taken and supporting information of a financial and legal nature.
The circular governs the scheme of arrangement, which is the legal process whereby shareholders vote on the proposed transaction. The scheme meeting happened on 17th February and shareholders gave Cartrack all the love they had left after Valentine’s Day, voting 100% in favour of the deal.
The timetable for a deal like this is a moving target. Although certain elements are governed strictly by the JSE (like the number of days between each step in the scheme process itself), the need for other regulatory approvals etc. means that the rest of the timetable is a best guess. In a process like this, the company eventually releases a “scheme finalisation announcement” which sets out the final dates.
This was released on 1st April and you can read it here if you are interested to see what it looks like.
Cartrack will be suspended on the JSE on 14th April. By 16th April, the transfer secretaries (who administer the scheme) must have received the election by shareholders to be part of the reinvestment offer or not.
Where shareholders elect to reinvest, they will acquire shares in Karooooo as a Singaporean company that is inward listed on the JSE. Importantly, this means that shareholders will not utilise their foreign investment allowance to buy these shares.
The subscription is based on a 10:1 ratio. This means that for every ten shares I own in Cartrack, I will be able to buy one share in Karooooo. This would theoretically give me the same percentage ownership in Karooooo that I had before, except Karooooo is raising more capital as part of the deal and issuing shares to new offshore investors. In other words, I will be slightly diluted. More on that later.
Just when you thought the Circular was a tough read, you’re now ready for the Boss Level of this particular game. The prospectus is 188 pages long.
Importantly, the prospectus is only issued by Karooooo because it relates to the new company being listed. However, because Karooooo is listing based on its intention to acquire Cartrack, the information about Cartrack is included. In fact, this is the most detailed document you will find about Cartrack’s business.
The prospectus gives all the details for the listing and the reinvestment option. If you are still deciding whether you like the company, the prospectus would be the right document to read.
My understanding is that if you do not elect to reinvest and you still hold the shares by the time they are suspended, you will only be paid R42 per share and won’t have the right to invest in Karooooo at that equivalent price. This would only make sense if you believe the Karooooo share price will drop after listing and you’re happy to walk away with R42 per share, but then you should’ve sold by now already at a much higher price.
If you want to invest in the new Nasdaq-listed company, you have to specifically elect to do so. If you hold the shares on Easy Equities for example, they should send out an email early next week with the details on how to elect to reinvest.
Why did the share price go nuts in early 2021?
In my opinion, people got carried away. I really like Cartrack but there’s no way I was buying more shares at the late January prices of nearly R90 per share!
On page 50 of the Circular, BDO gives an opinion that values Cartrack at around R37 per share. This is based on detailed work and shouldn’t be ignored. I feel ok having acquired shares at R45 per share and I suspect the BDO valuation is somewhat conservative, but I’m not surprised at all to have seen a significant drop in the price from the January highs. There was never justification for those prices.
Should I have sold? If I was a trader who is happy to pay the maximum tax rate, then sure. I’m in it for the long haul though, including following the company offshore, so I waited to see where the market would settle.
In hindsight, which is always perfect, the right trade would’ve been to sell in late January and then buy more shares now. Well done if that’s what you did!
Why are people talking about an arbitrage?
A true arbitrage allows investors to buy in one market and sell in another, realising a profit along the way. Importantly, buying a company at a cheaper price elsewhere isn’t a true arbitrage unless you sell it in the higher market and realise the difference.
There has been a pricing differential between Cartrack and Karooooo on the Nasdaq, which has already listed and raised some money. If you bought ten Cartrack shares today at R58 per share, it would’ve cost you R580. This gives the right to subscribe for one Karooooo share, trading at around $35 per share. At R14.50 to the USD, that’s R508 per share.
In other words, it’s currently cheaper to just buy one Karooooo share than it is to buy ten Cartrack shares which earn the right to buy one Karooooo share anyway. This should put downward pressure on the Cartrack share price (down 10.46% today) and give upward momentum to the Karooooo share price (up 3.86% at time of writing).
To execute an arbitrage, one would need to go short on Cartrack and long on Karooooo, hoping the share prices meet somewhere in the middle with gains on both sides. With Cartrack so tightly held, it’s unlikely that scrip is available for shorting anyway.
If you want to get in on the growth story now, it’s cheaper to buy a Karooooo share than ten Cartrack shares. Just note that you will be using your foreign investment allowance, as the shares are traded on the Nasdaq. As far as I know, it is not a breach of exchange control to own one of the foreign shares of an inward listed company. If anyone reading this can confirm or deny, please reach out and I’ll make a note of it.
If you plan to follow this strategy, make sure you confirm the exchange control position.
What does any of this mean, in simple language?
Right now, on the Nasdaq, American investors are trading shares in Karooooo based on the underlying economics of Cartrack. With a share price of $35 (and climbing), current exchange rates suggest they are valuing Cartrack at over R50 per share (and climbing).
That’s around 11% up from where I bought, which feels reasonable. It’s a shock to the system for anyone who chased the big gains in January and bought far higher.
The lesson here? Don’t chase massive gains unless you’ve done the research and fully understood them.
As for me, I’ll be ticking the reinvestment choice. I look forward to watching this company making me proud as a South African.