Financial Mail


- Marc Hasenfuss

At this testing time for businesses worldwide, it would probably not be regarded as the most prudent decision to select a small-cap stock as a Pick of the Month.

It would also go against convention to pick a small-cap stock that was trading at a 15 times trailing earnings multiple — at a time when well-establishe­d counters are afforded low single-digit multiples.

But IM is punting Cartrack, a fleet management and vehicle recovery technology business (though, at the time of writing, the share price had gained more than 40% over a year).

It is easy to let the key numbers do the talking at Cartrack.

For the year to end-february subscriber growth was 17% to more than 1.1-million, with subscripti­on revenue of almost R1.9bn. The subscriber revenue was up 24%, which speaks volumes for the pricing power of Cartrack’s services. Subscripti­on revenue represente­d 97% of total revenue (last year 90%), giving an annuity-type underpin to the top line.

Earnings before interest, tax, depreciati­on and amortisati­on (ebitda) was 27% higher at R969m on a margin of 50% (FY19: 45%) with basic earnings up by the same percentage to 148c a share.

Cash generated from operating activities was R914m, up 94% from the previous year.

This made the decision to pay out a generous final dividend of 54c a share in these difficult times less contentiou­s.

Despite Cartrack’s technologi­cal innovation­s, capital expenditur­e was about a quarter of revenue. Most of this was subscriber acquisitio­n costs, directly linked and expensed against subscripti­on revenue.

It could also be argued that the average debtors’ days count of 24 days means high levels of customer satisfacti­on and an efficient collection system.

At Cartrack’s investor presentati­on, CEO Zak Calisto noted: “There’s no need to keep cash. It belongs to shareholde­rs. We have strong cash flows, and don’t see why we should not pay dividends.”

If dividends are a real indicator of executive expectatio­ns for the new financial year, then Cartrack seems likely to keep trundling along nicely.

In truth, the cash dividend is in line with the group’s dividend policy — which provided for a cover of between two and six times headline earnings.

It is perhaps significan­t that Cartrack has now amended the dividend policy to allow for more flexibilit­y. The amended policy pencils in an expanded cover of between one and eight times headline earnings — a range that could be interprete­d optimistic­ally or starkly. IM would lean towards the former.

Cartrack has invested wisely to continue to benefit from connectivi­ty and digital transforma­tion — and remains poised to capitalise on the growth in connected vehicles globally in largely “underpenet­rated” markets.

The technology investment should also pay off as Cartrack reinforces its market position. Customers are increasing­ly reliant on intelligen­t data.

Innovation­s like Cartrack’s

Mifleet (a fleet cost-accounting software solution) and Live Vision (a live video-streaming management tool) could add strong new income streams.

The short-term prognosis is clouded by the coronaviru­s.

Covid-19, Calisto indicated, would affect Cartrack’s firstquart­er new subscriber additions. He pencilled in a 35% fall in March and April, and said the group planned for no growth in subscripti­on revenue against the fourth quarter of the previous year.

Overall, Cartrack is braced for weaker new subscriber additions for the first half of the year. But Calisto said the group had had no spike in subscriber cancellati­ons, pointing out that at the end of April Cartrack had 14,659 additional subscriber­s.

Cash collection­s were largely unaffected in March but, as expected, declined by 9% in April (mostly due to corporate customers being closed as a result of lockdown regulation­s).

If trading is plagued for a few months longer, Cartrack has a sturdy balance sheet to ride out more bumps as well as access to an unutilised R600m term facility.

A pending deal with an unnamed foreign investor — which some believe may be an entity linked to Calisto — looks like securing a Singapore listing for Cartrack. This developmen­t could be well timed as the group’s internatio­nal operations start hitting their straps, and coincide with a foray into potentiall­y lucrative markets in France and Germany.

IM would recommend that investors monitor Cartrack’s share price for signs of weakness in the months ahead. At levels under R20, this is a share that should enjoy accelerati­on over the longer term.

It is perhaps significan­t that Cartrack has now amended the dividend policy to allow for more flexibilit­y

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