Diversification in geographies, products and services; an integrated supply chain that protects margins and quality; proprietary software; in-house research and development; annuity-based income; a high cash conversion model; entrepreneurial management; high barriers to entry; and a world that is becoming increasingly driven by technology.
It couldn’t get more textbook-perfect for Cartrack, which specialises in fleet management tracking, stolen vehicle recovery and insurance telematics services.
However, Africa was an obvious problem in its February 2017 full-year earnings as many countries experienced poor economic growth and currency depreciation. Add to this the sad story of the rand.
Cartrack CEO Zak Calisto counters these detractors, giving the assurance that the African business remains operationally sound. Cartrack does not hedge its various currencies as this can be risky and costly, preferring to live with the winds of exchange rates, he adds.
In fact, post year-end, many of its relevant African currencies have already reversed their downward trend.
A booming industry naturally attracts new entrants and the number of players in the tele-matics sector is doubling every year. Despite this explosion, Cartrack says it has successfully maintained market share.
Another concern is that its extensive geographic representation – across five continents and 24 countries – is overly ambitious. But Calisto defends his expansion strategy: "We are not just throwing money at opening offices across the world and by no means do we want to be ‘everywhere but nowhere’."
It operates in only three European countries, and with huge upside in Asia-Pacific, had to establish a strong presence there, reaching breakeven point after just three years. It is also focused on countries where governments are increasingly mandating the use of telematics, such as the US.
And in high-crime jurisdictions, its stolen vehicle recovery offering supplements its fleet management telematics, with the rest of Africa being a natural progression as vehicles stolen in SA move up north.
Cartrack has strong financial metrics achieved purely through organic growth, in contrast to the acquisitive path of core competitors. Its five-year compound annual growth rate in revenue is 18% and return on equity sits at an impressive 55%. Growth in 2017 normalised earnings per share was 12%, moving to 22% if currency woes are excluded.
One notable number is the high stock level, of about six to nine months of trading. This is certainly not reflective of a slowing sales trend. Cartrack manufactures its own products from components with long and varying lead times, so to ensure the growing order book can always be met the cost of high holdings is justified.
Cartrack, which is essentially a software group, appears well-run and innovative, demonstrating that South African technology can compete head-on with the best in the world. Since listing on the main board in December 2014, its share price has risen 32% to about R12.50. This is three times the 10% growth registered by the crawling JSE all share index during the same period.
Calisto says we are only at the start of telematics and sees huge upside for this sector. The group will be investing in research and development over the next five years as it expands its prisoner tracking offering, builds on mobile asset and workforce optimisation solutions, moves into data analytics and starts to customise services for niche markets. There is no shortage of opportunities, he says — just a shortage of people who can service the demand.
This business is certainly in the right place at the right time as we move into a digitised civilisation in which everything – and ultimately everyone – will contain a telematics device.
• Gilmour is an investment analyst
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