En route to more riches
Karooooo has been a get-rich-quick punt since opting for its Nasdaq listing. It argues that growth is just beginning
ý At face value, the easy money appears to have been made on Cartrack owner Karooooo (Karo)*.
For a start, its share price has more than tripled since the announcement last March that the business would seek an international listing.
But founder, major shareholder and CEO Zak Calisto seems to think the growth journey has just begun.
Take Calisto’s
“founder’s letter”, issued last month ahead of
Karo’s listing on the
Nasdaq.
In it, he argues: “After being in the industry for
26 years, I believe we are only just commencing our journey. We believe that US investors will appreciate our vertically integrated
SaaS [software as a service] platform and the opportunity that lies ahead of us. We view listing on the Nasdaq as expanding our reach to diversified and sophisticated investors that understand our business which, in turn, will assist us in attracting customers and talent and help us generate value for our shareholders.”
Investors eavesdropping on last week’s fourth-quarter earnings call would have got the same impression, and clearly heard the interest from US-based investors, who dominated the question & answer session.
In the investment presentation Calisto reinforced his bullish outlook, noting a “tremendous runway to drive long-term growth in this massive market”, where the vehicle population continues to grow and there is an increasing demand for digitalisation.
The latest numbers bear this out. Subscription revenue shifted up a sprightly 14% to
R574m against the fourth quarter of 2020. The recovery in subscribers gained traction in the third quarter. It extended convincingly into the fourth quarter, with the number up 16% to more than 1.3-million against the last quarter of the 2020 financial year.
Calisto said subscriber growth could partly be ascribed to a trend of customers wanting digitalised software solutions to curb their higher operating costs. Cartrack software also works on changing unproductive use of resources and inefficient workflows.
Total revenue grew 21% to R616m, with the sale of telematics devices to a large mining house that opted for a nonbundled contract causing an unusually high increase in nonsubscription-based revenue.
Calisto said the group remains focused on bundled sales — sales involving a subscription agreement over five years.
Cartrack operates across multiple geographies, though SA remains its stalwart market, with more than a million subscriptions (up 17% in 2021) and annual earnings before interest, tax, depreciation and amortisation (ebitda) of R894m (generated at a robust margin of 53%).
Asia Pacific is the second-largest market, but Karo sees it as having the greatest potential, “as markets remain considerably underpenetrated due to fragmented market participants delivering entry-level offerings”.
During the period, growth in Asian Pacific markets was hampered by lockdown protocols leaving key staff stranded in Singapore. Still, adjusted ebitda increased 38% to R92m.
Aside from well-established positions in Africa and Europe, Cartrack has also made a “strategic” investment in the US.
Karo says there’s plenty more opportunity to build momentum in its profits.
It’s one reason for the 24% jump in operating costs, to R225m. That’s because Karo has gone on a significant recruitment drive to beef up its sales, customer experience and research &
SCREECHING AHEAD Karooooo share price (R) – daily
development (R&D) functions. Cartrack added 440 employees in the last two quarters of the past financial year.
If these employees can match the profit per staff achieved by Cartrack employees over the past six years, there could be a profound impact on profits in the next few years.
And Karo’s recent Nasdaq listing raised $33.8m in fresh cash, which Calisto said will be largely spent on R&D.
Chris Logan, CEO of Opportune Investments and longtime backer of Cartrack, reckons Karo could be the most exciting growth story since Capitec listed in early 2002.
He points out that over the past 11 years Cartrack, which listed on the JSE in 2014, has grown its subscribers at a 10-year compound growth rate of 20% a year, increasing its subscribers from 209,680 in February 2011 to more than 1.3-million at the end of February this year.
“This pips Capitec’s 10-year compounded growth rate in clients of 18.8% a year,” says Logan, “though it must be remembered Capitec
has a far bigger base of 15.8-million active customers and in earlier years grew in excess of 30% a year.”
The Capitec comparison is also apt from an operational view. Cartrack’s tracking system proved a major market disrupter given its low cost — about R150 a month.
Basically Karo’s low cost of subscriber acquisition and cost of servicing subscribers, coupled with a consistent average revenue per subscriber (Arpu), gives the business an edge over its competitors.
Cartrack’s Arpu has inched up from R151 to R155, mostly due to currency fluctuations. It says its Arpu has been consistent for the past 15 years. “We have not tried to push Arpu. We focus more on customer acquisition as opposed to Arpu as we believe the market is largely underpenetrated.”
With competition in mind, Cartrack does have two more pertinent points of comparison — JSE-listed MiX Telematics (also subject to ongoing rumours around a Nasdaq listing) and Altron’s Netstar.
Logan estimates MiX has a 10-year compounded growth rate in subscribers of 12.1%. This has meant the longerestablished MiX now only has 750,000 subscribers. Netstar has about 833,000 subscribers.
One potential worry for investors is how sustainable Cartrack’s margin will be as expansion continues apace. It came up during the investment presentation with a US-based analyst keen to determine if there was a floor for the operating margin and how far the group would go in terms of increasing investment for higher growth.
Calisto was refreshingly frank.
“When I look at the business I don’t really look at the margins as being my key driver. Our key drivers are allocating capital. Is it being used prudently? Are we going to see the rewards? For as long as we believe we’ve got things under control, we’ve got the right management in place, we will continue investing and allocating capital.”
Calisto explained that much of the group’s operating expenses stemmed from acquiring new customers.
“They basically go through your income statement in year one … in actual fact, on the day you acquire those customers on the month. Obviously those expansion costs and those customer acquisition costs will have a drain on your income statement in the short term. But our customer retention is 95% … so we will get the reward of acquiring those customers for many years to come.”
Despite the lingering uncertainties of Covid, Karo has pencilled in a subscriber number of between 1.5-million and 1.6-million for the 2022 financial year, with subscription revenue of between R2.5bn and R2.7bn.
Its adjusted ebitda margin range was set at between 45% and 50%.
Pushed by an analyst at the presentation, Calisto confirmed that Cartrack had surpassed the 1.35-million subscriber mark in the first quarter of the new financial year.
“We continue to see the growth that we saw in the last two quarters. Traditionally our worst quarters are the fourth quarter and the first quarter, given all the holidays. [But] we’re seeing a very good first quarter, and are quite happy with the growth so far.”
Our key drivers are allocating capital. Is it being used prudently? Are we going to see the rewards?
Zak Calisto