Cartrack’s star turn
Plucky little Cartrack is one of only a few JSE firms forecasting any real growth. Should Netstar be taking a closer look?
The vehicle tracking and fleet management sector has remained one of the few sweet spots in the local economy. Unrelenting crime, and the increased need for logistical vigilance as companies look to reduce costs, is good for some businesses.
But while the sector is bucking the trend in a dour economy, technological advances and product innovations are helping some companies speed ahead faster.
In this regard, tracking the recent interim performances by telematics firms Cartrack, which is controlled by entrepreneur CEO Zak Calisto, and Netstar, controlled by technology conglomerate Altron, makes for some intriguing comparisons.
Before looking at the numbers, it is worth noting that Netstar was founded in 1994 and Cartrack a full 10 years later — a fact that might underline the difference between a company that operates in the relative safety of a corporate holding structure and one that is largely entrepreneurially driven.
Cartrack is one of the few companies on the JSE openly forecasting double-digit growth at top and bottom line.
Opportune Investments CEO and stalwart Cartrack shareholder Chris Logan says the company is a rare open-ended growth story run by an "incredibly competent" CEO.
The scoreboard shows that in their respective latest interim periods, Cartrack increased revenue by 19% to R939m and Netstar by 3% to R764m. One might have assumed the implied market share gain by Cartrack would have meant sacrificing margins. But the group’s earnings before interest, tax, depreciation and amortisation (ebitda) was up a jaunty 28% to R480m on a well-reinforced 51% margin.
Netstar, meanwhile, showed a 13% gain in ebitda on a steady margin of 39%.
That performance is hardly shabby, but it would seem Cartrack is streets ahead, at least for the moment.
Now, it could be argued that a comparison between the two companies is not appropriate — Cartrack also operates in Europe, Africa, Asia-Pacific and the Middle East, while Netstar has a smaller global reach in Australia, Malaysia and certain African countries.
Perhaps it’s more instructive to look at Cartrack’s core SA segment, which showed a 16% top-line growth to R682m and an 18% gain in ebitda to R385m. The key margin edged up to almost 56.5%, well ahead of Netstar’s overall ebitda margin.
The key question is whether Netstar, whose parent company, Altron, is in the throes of a turnaround effort led by the well-respected Value Capital Partners, can accelerate growth or whether Cartrack will open the gap up further in the next few years.
Netstar’s globally connected car partnerships with Toyota and Vodacom (as detailed in the accompanying Altron story) look like a good opportunity to spur top-line growth and market reach. But Altron’s interim results booklet is not exactly forthcoming with nitty-gritty details about Netstar’s performance. One does, though, get the sense that Altron’s plans to double ebitda by the 2022 financial year (from the 2017 financial year’s number) is hitched firmly to Netstar’s progress.
Cartrack, on the other hand, does not hold back. The big "flash" number was that the figure of 1-million subscribers was surpassed. Calisto describes this as "a significant milestone which places us among a select group of global leaders in mobility solutions".
But for the FM the key number is that subscription revenue (in other words, annuity income) grew 26% to almost R900m, and reached a record level of 96% of total revenue.
On top of that, Cartrack increased cash generated from operating activities by 70% to R446m, reinforcing the quality of the headline earnings of 72c a share.
Unlike most listed companies, Cartrack is in the enviable position of being able to highlight the efficient deployment of capital with return on equity of 47% and return on assets of 28%.
That shows in its performance since listing: a powerful 152% rise from December 2014, versus the all share index’s measly 14.8% return.
Looking ahead, it seems the core SA market will remain Cartrack’s biggest growth engine for some time.
Calisto tells the FM that Cartrack was heading for a record October of 30,000 vehicles being fitted, compared with a previous best of 26,000. "The SA vehicle market is only lightly penetrated, at about 35%-38%. We still see good demand and growth, especially with our new platforms, which are set to be launched in the next 18 months."
One initiative that has taken off slowly is Cartrack’s low-cost insurance offering. Calisto says sales have reached around 1,000 policies a month. "It’s been slow start, and we did think we would be further down the road. But we are confident of pushing sales to 10,000 policies a month next year."
The real beauty of Cartrack’s business model is Calisto’s contention that the new-generation smart telematic devices are engineered with enhanced features at a lower cost. This means Cartrack can carry a higher device inventory at a lower value than at the end of the financial year-end.
More importantly, Calisto says these new devices capture richer data, allowing for a further expansion of Cartrack’s data offerings.
Bringing aboard enhanced technology delivery at lower cost is certain to be a big enabler for Cartrack in the years ahead. This should pacify the (few) shareholders who are miffed that Cartrack’s dividend policy has become stingier as it spends more on research & development.
While Cartrack (which has a nascent market in the US too) has plenty of growth opportunities on its plate, it’s still difficult not to ponder the possibility of corporate action.
And here the FM is thinking of action perhaps involving Netstar.
On paper it’s easy to visualise a share swap deal with Altron, of Netstar merging into Cartrack in exchange for an issue of shares.
This could accelerate the upside on the telematics side for recovering Altron, and give Cartrack a markedly larger operating platform that new longer-term opportunities can be built on.
In the meantime, Cartrack seems content to acquire skills from its rivals, having earlier this year wooed former Netstar veteran Harry Louw as CEO of its SA operations and former MiX Telematics SA MD Brendan Horan as chief strategy officer.