Summary
- MiX Telematics operates in the Fleet Management industry which is growing fast, yet is under-penetrated.
- Its excellent management team has grown MiX from a start-up to becoming a differentiated and profitable global player.
- Temporary headwinds and selling pressure have weighted on the stock since the August 2013 secondary IPO, resulting in an attractive valuation.
The Fleet Telematics industry is a fast-growing yet under-penetrated industry, experiencing multiple tailwinds. This is an excellent industry to invest in, if one is able to find a company with competitive products, a culture of innovation, a global footprint, and trading cheaply enough. Well, I believe that I have found those qualities in MiX Telematics (NYSE:MIXT), a small-cap South African SaaS-centric telematics operator. MiX is making strides into becoming a significant global player, and in the way disrupting the industry with its innovations. In this report, I will walk the reader through the dynamics of the industry, and make a claim that MiX Telematics is poised to becoming a key industry incumbent. I will discuss the unique qualities that MiX possesses, and end with a discussion on the absurdly low price it is trading at.
The Business
It is no wonder, then, that the telematics industry is growing at a fast pace. According to a Berg Insights research quoted here, dating May 2014, the number of globally installed fleet management units is expected to grow at a CAGR of 20% throughout 2018.
The author had thus found it surprising that the penetration rate in non-privately owned commercial vehicles is only 9.1%, at the end of 2013, according to the same source.
Numerous companies seem to have spotted the high-growth under-penetrated nature of the industry. With barriers of entry only seemingly low, the industry has become fragmented, with hundreds of telematics solution providers globally. The Berg Insights' report lists the largest 10 providers, having more than 300,000 subscribers:
MiX Telematics is a smaller player, and thus not listed in this figure. Although MiX's subscriber count is close to 500,000 and may seem relatively large, this is not an apples to apples comparison. MiX is counting commercial, as well as consumer subscribers of its Beam-e vehicle tracking device, while the Berg Insights research counts only commercial vehicles.
Not all telematics providers were created equal. At the lower end of the spectrum, one can find the OEM solutions, which are often bundled and sold with the vehicle. Scania, DAF, Renault, Volvo, Mercedes-Benz - all bundle basic telematics solutions with the trucks and trailers they ship. These solutions provide basic vehicle tracking, service call alerts and workforce reporting services. This segment of the market is becoming commoditized rapidly. An indication for this trend is the introduction of the AEMP standard, which standardize the method of telematics reporting, allowing fleet operators to easily integrate data from multiple vehicle vendors. At the middle of the spectrum are the call center operators, such as the Israeli Ituran (NASDAQ:ITRN) and Pointer (NASDAQ:PNTR). These companies, focused in just one or a select few locales, do provide value-added services such as person-assisted navigation, stolen vehicle recovery, and geo-fencing. Nevertheless, their offering is inferior to that of the SaaS-centric solution providers. First, the value of their service to the end user is generally lower, as both the fleet operators and the drivers must interact with the call center to get service. Secondly, operating a call center is more costly on an ongoing basis, and less scalable than SaaS. Lastly, call center operators have less leverage to introduce disruptions and innovations such as usage-based insurance, real-time fuel efficiency and driver safety feedback. At the top of the spectrum operate the SaaS providers, such as Omnitracs (a divestment of Qualcomm), Trimble (NASDAQ:TRMB), Fleetmatics (NYSE:FLTX), Masternaut, and also MiX Telematics. Omnitracs and Trimble dominate the U.S. market, while Masternaut dominates the EU. These companies have developed expertise in understanding and servicing the specific needs of large fleets in various industries. Rather than providing a basic commoditized service, they focus on increasing the ROI of their subscribers through developing tailored solutions. The data, and insights based on this data, can be accessed from anywhere over the web through sophisticated SaaS platforms. Even in this high end of the spectrum there is a large variability between providers. Fleetmatics, for example, focuses on small fleets, especially in the consumer service sectors, such as plumbing, phone and cable service. Omnitracs is the U.S. leader for large fleets and focuses on vehicle tracking, driver safety and regulatory compliance. Masternaut provides an all-encompassing service for both large and medium fleets, but has a regional focus in Europe. The comparison below highlights the differences in focus between MiX and some key incumbents.
MiX Telematics has a unique geographic focus in developing countries - South Africa, The Middle East, and lately Brazil, while executing an expansion plan into developed countries. It has a significant presence in Africa, and a fully-staffed office in United Arab Emirates (UAE). I believe that MiX is best positioned to attract the lion's share of large fleets in those regions. Its mature stolen vehicle recovery service provides a competitive advantage, as car theft is a severe problem in those regions. Locally in South Africa, MiX is dominant by providing a full range of solutions, from the inexpensive Beam-e vehicle tracking devices, designed for consumer vehicles (but used by commercial fleets as well), to the full-fledged SaaS-based fleet management package. Globally, MiX is focusing on large fleets, and especially Oil and Gas operators. Among its customers are BP, Chevron, Schlumberger, Shell, Rio Tinto and others. Those multi-nationals possess specific needs, which MiX has gained the specialization and able to address in a competitive way.
MiX had proven to have developed a strong R&D team, with a rooted culture of innovation. An example for this innovation ability is the recently launched MiX Vision product - a hardware device which includes in-cabin and outward-facing cameras, able to record HD video continuously. In an event of an accident, it provides footage to the fleet operator and its insurer. In addition to promoting driver safety, it has the potential to assist the operator in dealing with claims more efficiently. MiX is developing its next-gen fleet management platform called DynaMiX, and had announced that it will ship during the first half of 2015. The platform is said to improve the user experience, and provide a better infrastructure which will enable the rolling out of updates and new features faster. This may be a catalyst for increased sales growth. In addition, the company is investing R&D efforts in reducing the manufacturing costs of its hardware, which will support profitability.
In addition to its geographic focus and R&D excellence, MiX's other unique competitive advantage is its cost structure. Based in South Africa, its R&D and G&A expenses are lower than in Silicon Valley or Western Europe. R&D expenses range only 5%-7% of revenues, vs. 18% of Trimble's. The company has 800 employees working out of South Africa, in which the salary levels are about a third of U.S. salary levels. Being a global operator based in South Africa is a cost advantage.
MiX's business is faring well. Its subscription revenues are growing at a very fast pace, and its margins are healthy, as shown in the table below.
Q2'15 (Sep 30th 2014)
|
Q1'15 (June 30th, 2014)
|
FY'14 (March 31st, 2014)
|
FY'13 (March 31st, 2013)
|
FY'12 (March 31st, 2012)
| |
subscribers
|
479,000
(19% growth y-o-y)
|
462,000
(23% growth y-o-y)
|
450,502
(25% growth y-o-y)
|
359,643
(32% growth y-o-y)
|
272,935
|
subscription revenue
|
R241.8
(17% y-o-y)
|
R236.6
(22% y-o-y)
|
R853.7
(24.3% y-o-y)
|
R686.7
(19% y-o-y)
|
R577.3
|
total revenue
|
R351
(11.4% y-o-y)
|
R319
(12% y-o-y)
|
R1,1271,658
(9.6% y-o-y)
|
R1,171,480
(15% y-o-y)
|
R1,018,482
|
gross margins
|
68.3%
|
66.3%
|
66.8%
|
63.7%
|
61.6%
|
EBITDA margins*
|
20%
|
16.3%
|
25%
|
24.8%
|
23.6%
|
*MiX reports its R&D expenses in a rather different way than the other companies. Under IFRS, MiX capitalizes its R&D expenses (called "product development costs"), and expenses an amortized sum (amortized over 1-12 years). This makes economic sense, but should be taken into consideration when compared with GAAP reporting entities, which expense all their R&D costs once accrued. In an environment in which R&D costs are rising, the amortized expense may lag, and may over-state operating profit and EBITDA (compared to expensing all development costs immediately). I did not capitalize the R&D expenses for the peer group, as I am assuming that the effect would not be material enough to be worth the efforts.
One can notice that the subscription revenue growth rate outpaces that of total revenue, as evidence of the growth in MiX's bundling model. Under this model, customers pay a monthly fee which accounts both for the service and the hardware, rather than paying for the hardware and the SaaS separately. Sooner or later, the subscription revenue will outpace the hardware revenue, and the top line will grow even faster, providing a catalyst for re-rating and stock price appreciation.
The SaaS-centric business model is scalable, as the marginal costs of servicing new subscribers lowers as revenue scales. As the company adds subscribers, its gross margins will continue rising. The company is guiding a target of 70% gross margins, which seems achievable within a few years. EBITDA margins are healthy at 20%-25%. During the last year, the company increased its investments for growth, and especially marketing and SG&A expenses, and hence its EBITDA margins have suffered. Some of those SG&A expenses, which included those for recruiting new talent, advertising and infrastructure expenses, are conceptually capital investments for growth. Yet according to IFRS (and GAAP), those are fully expensed as they occur, and thus weigh on operating and EBITDA margins. Still, the 20% EBITDA margin achieved in the recent quarter is an excellent result. With a scalable SaaS model, a 25% EBITDA level is achievable and sustainable. It is expected once the company scales, and is able to curb its investments for growth. Those high margins are a testimony of the company's competitive advantages.
The Management and Ownership
President and CEO Stefan Joselowitz is an entrepreneur at heart. Educated in electronics, he started his career as a field engineer, and then broke independent and owned a restaurant. Joselowitz returned to electronics in 1985, serving as a sales director and later as the CEO of a company developing systems for the automotive industry. In 1996, He had founded Matrix Vehicle Tracking, which ultimately evolved into MiX Telematics. Initially, Matrix focused on stolen vehicle tracking. Ten years later, in a series of bold and clever strategic steps, Mr. Joselowitz had put the company in the path to becoming a global player, making $120M in revenues and operating in 112 countries. In 2007, Joselowitz has expanded Matrix Vehicle Tracking into fleet management by acquiring a South African fleet management company, Omnibridge. Five acquisitions followed later, which strengthened the company's SaaS-centric offerings, and also gained a footprint in Australia and the UAE. Joselowitz took the company public in 2007 through an IPO in the Johannesburg Stock Exchange. In August 2013, the company had gone through a secondary IPO of ADS in NYSE, keeping the proceeds in US $, to support its expansion plans into the Americas. Joselowitz and his management team's merit is evident through the following strategic decisions since 2007:
- Building the company's strength initially in developing markets, centering around stolen vehicle recovery where they have a leading position.
- Expanding into developed countries through focusing on large fleets, especially in the Oil and Gas sector, which was under-penetrated.
- Growing its R&D in South Africa to achieve cost competitiveness, while the CEO moved to the U.S. to develop the company's presence there.
- Maintaining a clean balance sheet with very little debt. Even stopping the dividend when IPOed in NYSE in August 2013, to build its cash pile towards expansion.
It is refreshing and encouraging to see owner-operator Stefan Joselowitz taking a reasonable compensation of R10M in 2014 (about $1M), including bonuses. Joselowitz owns a 3.5% stake in the company, and has a sizable options position as well. Directors and executive officers own 15% of the shares in aggregate. This sizable stakes helps in aligning the interests of directors and management with that of the outside shareholders. Mr. Joselowitz candidly discusses the company's operation and strategy, not only in earnings conference calls, but also in interviews (here, here and here).
The largest shareholder is a public South African holdings company named Imperial Holdings Limited, which operates in the logistics and auto import segments. Imperial owns 25.5% of the company. It is adequately financed, with net debt lower than equity. More often than not, debt laden holding companies squeeze their cash-producing subsidiaries for dividend. It is thus encouraging that Imperial supported stopping dividend distributions since the NYSE IPO, to help build a cash pile towards expansion. Imperial maintains a board seat. Other notable holders are the GAF family fund (8.9% stake), affiliated with Robin Frew, a director owning a 7.8% stake, and Masalini Capital (7.5% stake). Both GAF and Masalini used the IPO as an opportunity to sell some shares, while Imperial increased its ownership.
In June 30, 2013, just before the IPO of the ADS units in NYSE, insiders (executive officers, directors and 5% shareholders) held an aggregate of 63% of the shares outstanding. Exactly an year later, that number was 48.7%, while the share count grew from 660M to 748M during this period. This means that insiders had sold almost 80M shares during and since the IPO. This may shed a bit of light on the selling pressure resulting in share price decline from $20 on the day of the IPO to $6.3 at the time of writing.
The Price
A look at MiX's ADS price (representing 25 South African stocks) since its August 2013 IPO shows a price going nowhere but south. From a peak of $20 per ADS to a trough of $6.3 (and no signs of stopping there). Nevertheless, a look at the 5-year price chart of the stock trading in the Johannesburg stock exchange, presented in the figure below, reveals a broader picture. It seems that the stock was hyped right before the August '13 IPO, and now deflated back to 2012-2013 levels. Either the stock is unloved, as investors shy away from South African small caps, or that the selling pressure is high, artificially creating a bargain. Well, is it a bargain?
(source: markets.ft.com)
At $6.3 a share, Price/Sales is x1.7, and EV/sales is only x1.1. Compare that with other SaaS-centric businesses. It is very hard to find SaaS-centric companies trading under EV/sales multiple of x2, and some trade up to even double-digit multiples. MiX is projecting FY'15 (ending March 30th 2015) midpoint EBITDA of $22M. With an Enterprise Value of only $126M, forward EV/EBITDA is only x5.7. Bear in mind that TTM EBITDA is depressed due to the increased investments for growth. P/E stands today at only x10, when deducting the massive still-not-operational cash pile that was raised during the 2013 IPO. Considering that revenues are growing consistently at double-digit rates, and profitability has a line-of-sight to expand, the stock looks unthinkably cheap. It would be adequate to pay twice as much, even today. While predicting a future price is like throwing darts in the dark, it is not unreasonable to envision a conservative scenario where in 2-3 years revenues reach $170M, and EBITDA is at 25%, or $34M. At a conservative EV/EBITDA multiple of x11, and net cash level half of what it is today (assuming the other half, or $40M was invested for growth), market cap would be $414M, more than double today's prices. With momentum of improving business results the stock could even be a triple or more. With a float equaling to 18.4M ADS units, and no significant U.S. institutional ownership, once the selling pressure erodes, and the expansion story gains credibility, re-rating will result in a share price trading much higher. Another way to think about valuation, is asking oneself how much would another company or a private investor will be willing to pay for MiX Telematics. We may infer from one commonly found example. Trimble acquired TMW in August 2012 for $335M. TMW had trailing revenues of $96M, and revenue growth in the teens. The acquisition price equaled to x3.5 of sales. If MiX Telematics is worth as much, its shares should more than triple.
Now to the downside protection. What would MiX be worth should headwinds persist and it is not able to grow profitably? From a balance sheet perspective, I believe that the recent book value of $150M (21% lower than today's $190M market cap) is a lower bound for the company's worth even if business results worsen. The company's intellectual property, gained through almost two decades of development and acquisitions, is probably worth not less than the $62M of intangible assets in the books. Equity is not in a real risk of eroding, as the company is profitable with a healthy margin. In addition, debt is insignificant. From a going concern perspective, in the unlikely scenario that revenue growth stops, I'll take the TTM depressed net earnings of $13M and give it a P/E of x10, resulting in $130 market cap (31% lower than today's $190M market cap). Take these numbers with a grain of salt. It is hard to put a number on the downside. Having said that, do I see a reasonable scenario for MiX to be worth less than an EV of $115M? No, I don't. It may continue sliding, but I believe that eventually fundamentals will drive the stock price back up.
How come this opportunity exists?
Applying Howard Marks' concept of second-level thinking, the reader should ask herself what she had been missing. How come a profitable growing company, operating in an under-penetrated industry, being innovative and competitive and having a good and honest management, is trading at these absurdly low valuations? Let's walk through the possible reasons.
The company had experienced a few temporary headwinds, as of lately. The Africa segments has been growing by only 5.2% in the first half of FY'15 vs. FY'14. According to management, it is a result of the soft South African macro environment. South Africa has been suffering from high profile labor strikes in its mining facilities, massive scale electricity outages, high unemployment, and political unrest. The International Monetary Fund (IMF) has recently slashed South Africa's growth outlook for the third time this year, this time to 1.7%. I do not pretend to have a macro crystal ball, but my thinking is that as the situation gets worse, the chances for it to are rising (reversion to the mean). And while the entire South African economy is taking a hit, the reader should bear in mind that MiX generates only 50% of its revenues from Africa. Eventually, the situation will be alleviated. While Africa is suffering, MiX is able to make 28.6% EBITDA margins in this region.
Another headwind is the geopolitical turmoil in The Middle East. In the first half of FY'15 (Ended Sep'30 2014), revenues of The Middle East and Australia segments were down 2.9% y-o-y, and EBITDA margin was about zero. Management indicated that although they had bookings, they could not deliver to many of them due to security risks. The Middle East situation may go on for a while, even a very long while, yet the company has a competitive advantage of having presence in the region (an office in the UAE), and is willing to operate in this tough neighborhood. Sooner or later, it will find a way to profit in this region, or exit it altogether.
Let's continue walking through the potential reasons for the slump. CEO Stefan Joselowitz has been publicly stating his disappointed from MiX's Q1'15 and Q2'15 results, compared to his internal plans. Well, if a double-digit SaaS revenue growth, and above 20% EBITDA margin is disappointing, I'm glad to buy into that disappointment.
The market may be concerned about the risk of commoditization, with the introduction of the AEMP telematics standard. I believe that value-added services, such as MiX's SaaS capabilities are not in risk of commoditization.
If that was not enough, MiX' entrance into Brazil has suffered delays, after Sascar, with which it had cut a deal to run a JV, had stalled on its execution after being acquired by Michlin.
Lastly, shares may have experienced some selling pressure, as insiders have used the high prices of the 2013 IPO to unload 80M shares. Stopping the dividend may have pushed the dividend seekers to liquidate their holdings.
Unless I'm missing something significant, none of the headwinds listed above are ample reasons for the enterprising investor to avoid the stock. Headwinds, as long as they are temporary, are opportunities to tap into an excellent business at an excellent price. Taken into perspective, while all the bad things above had happened, the company remained profitable and continued investing for growth. If I were to provide an educated guess as for main reason of the year long stock price decline, I would say that it is probably a result of an unwarranted hype just before the 2013 IPO, and massive share unloading by insiders following the IPO, partially capitalizing on their early gains, combined with dividend investors moving on.
Catalysts and Risks
There are numerous catalysts that may result in re-rating and share price appreciation:
- Improvement in South African macro
- Making progress in tapping Brazil, either through re-igniting the cooperation with Sascar-Michlin or any other constellation
- Gaining traction in Europe and US, contributing to top-line growth
- New products (DynaMiX, MiX Vision) and/or industry disruption, mainly in the insurance space (usage-based insurance)
- Proliferation of the bundling model which will result in increased revenue growth rate
- Industry consolidation supporting increased pricing power
- Merging with a bigger telematics company
- Alleviation of the selling pressure by insiders and dividend investors
As for the risks, besides the trivial business ones, I believe that the main risk MiX Telematics faces is the inefficient use of their newly raised capital. If future investments fail to grow revenues in the Americas, profitability will suffer, and MiX may run out of capital to invest. Another risk would be that of a substitute technology pulling the rug underneath MiX and other fleet management solution providers. The third is a deterioration of the macro environment. I see all the risks as unlikely to materialize in the short and medium term, yet obviously I cannot quantify them.
Summary
In summary, I believe that MiX Telematics presents a very compelling risk/reward opportunity. An investor in MiX Telematics would involve herself with an excellent management team, possessing a proven track record of innovation and strategic decision-making, operating in an under-penetrated industry which is steadily growing and will ultimately consolidate. At $6.3 a share, this is a potential double or a triple.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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