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$KARO – Comprehensive DD – Recent IPO – Exec Summary (ISA Friendly)



Exec Summary for those that want a TL:DR

Firstly – I am an existing shareholder, own around 900 shares with an average buy price of $34 (so I am down on this… but in the current market, who isn't). KARO are a leading global provider of vehicle telematics. The proprietary in-house technology provides the best intelligent, actionable data to fleet operators and security for all vehicle owners – across 23 countries over 5 continents. Most interesting areas of the business to me are their AI Video & Fleet Telematics, along with how they use their data to sell used cars and insurance in the future. I am impressed that they seem to keep developing the business, whilst maintaining a very healthy 15% margin.

  • KARO is a holding company, the actual company is Cartrack
  • 1.3m subscribers with 50 billion data points each month – data provides KARO with a huge opportunity for growth
  • Business has continued strong growth through Covid (16% compared to 22% CAGR previously), expected rate is 26% for future years
  • Free cash flow around 25%
  • Prior to delisting from JSE, to list on NASDAQ and then do an inwards investment back onto the JSE – the stock price hit $629, with a share consolidation taking place at 10:1 – giving at all time high of $62.90 per share. Typically South African investment is more conservative that US/EU investors – who are more accepting of potential earnings forming part of the share price.
  • Price to earnings is 28x – which is low in their industry, with the average being around 53x

Agenda

Products & Services – currently on offer & pipeline offerings

Customer Profile

Financials – main metrics I like to consider

Bull Case

Bear Case

Share Structure

Key Catalysts

AOB

Products & Services

What does KARO currently offer?

B2B – known as 'My Fleet' – Live Vision to make sure the driver is concentrating and not on their phone, insurance telematics, fleet management and optimisation, stolen vehicle recovery and fleet administration services. All services typically outsourced, not many companies I know of will invest in developing this tech themselves which is good for Karo.

B2C – known as 'My Car' – Vehicle protector, stolen vehicle recover (with promise to customer), crash alert to emergency services and insurance telematics.

Customer Profile

South Africa – De Beers, MAN, Avis, SA Taxi, Super Sport, Hino and many more – company originates from SA and very strong YOY performance here.

Rest of Africa – Toyota, Cat, Moove and NCBA

Europe – LaFarge, Telefurgo, Green Galaxy and Sonae MC

Asia – Singapore Prison Service, ORIX, Grab Rentals & Asia Brewery

Lots more to list – company has accounts open in the UK and US – with very small amounts of trade at the moment, but they have a track record of aggressive expansion whilst maintaining margins.

Financials (Converted from ZAR to USD… took a while, so apologies if you spot any errors)

Without doubt my favourite part of this company, extremely strong performer and growth looks very positive, with sufficient results to back up projections.

Low Debt – $1.2m

Total Cash – $7m

Free Cash Flow Margin – 25%

Total Assets – $140m

Total Liabilities – $56m

Debt Coverage – Well covered by operating cash flow (2019%)

Gross Margin – 71%

Revenue – $167m (c.4.5x market cap)

Earnings – $27.7m (roughly 15% margin & 28x market cap – industry average listed on Nasdaq is c.50x)

I will post a link to their IPO pack in the comments section – I have looked at the financials over and over, I really struggle to see any negatives but if you find any, please can you leave a comment as I want to keep educating myself.

Bull Case – Top 4 Points

Aggressive, rapid and consistent CAGR – in the 20% range. I absolutely love this, I know I'm down right now but my price target to exit this stock is around $45 as a low estimate. Even with the market performing badly, I am not worried about my investment here. It isn't speculative, they are delivering.

Big data – its been big for a long time, I'm convinced it will continue to be big in the future. They already generate 50 billion data points a month from their existing contracts. They are looking to get further integrated with the insurance market and second hand car sales. Knowing how people drive through their current offerings is going to be huge in selling products that instantly fit with the consumers goals. If they drive fast… maybe upsell the car and have an insurance package wrapped up to help seal the deal. If they are more conservative drivers but have a powerful car, sell something more appropriate. I think this is a major opportunity for the business.

The world is going to see more crime, insurance premiums are rising, people want more protection and Karo offer a service that fills this space. Yes, there is telematics competition but in the nicest possible way car theft in the regions they currently operate in is pretty high and in regions that they don't yet operate in. Factor this alongside how much crime will increase in a post covid world (due to poverty increasing), I think that their CAGR of 26% will be achieved. Rich get richer… poor get poorer etc, its sad but generally true. Those with money will want to protect their valued assets without risking their own personal wellbeing.

Businesses need what Karo are selling. Whether its AI controlled systems or human, fleet management want 99% plus optimisation, with Karo's growth and products on offer, they simply must be offering a high quality product. Live vision & fleet tracking is something I can see growing more and more. I know from personal experience of having to deal with a particularly painful Brexit, this would have been a life saver had all the fleet been managed in this way and could be traced at a click of a button. Integrated supply chains rely on this real time data, which to my disbelief doesn't currently exist throughout the world. Note – biggest single customer represents less than 2% revenue, so they are heavily diversified.

Bear Case – Top 4 Points

No major contracts in USA, Germany, France or UK. I don't know why, maybe it isn't in their strategy right now, but I'd really like to see them get a big contract in one of these regions. I'm sure it will come but it isn't there right now and although they may well do well in China – the markets I mention are strong and relatively stable compared to South Africa and current countries that they operate in.

Volume – its pretty low, the good news is… its a buyers market – the spreads aren't great, so would only enter with a limit order if you did decide to invest, be patient and I'd say no real need to click the ask button right now.

Competition – there is clear competition in the telematics industry, I'm not even going to try and counter this as its a basic fact. I have based my investment on the numbers I see in their investor pack, only you can decide whether these numbers are suitable for your investment and offer competitive value against other investment opportunities.

The number of risks listed in their SEC prospectus filing was pretty crazy – my positive spin on this is that they are aware of their risks, honest about them and have strategies to counter/mitigate against them. I'll post the link so you can check this out too, but please do before making a decision on whether to invest.

Share Structure

Relatively simple section – NASDAQ is the priority listing, total of c.21,000,000 shares – 20,000,000 held by insiders with a 180 day lock up. 9,000,000 listed on the JSE as in inwards listing.

Cartrack (KARO) used to be listed solely on the JSE – but due to expansion plans, has now listed on Nasdaq… it was listed the same day as UTME and genuinely believe a lot of investors missed this IPO due to the hype and price increase on UTME.

The company was previously valued at over $1 billion on the JSE and the CEO didn't sell any shares, as he went on record to say that he felt the company was worth at least $1.5 billion.

Key Catalysts

Earnings are due soon – I have spoken to their Investor Relations team and expected first week of May. I'm expecting that these are positive.

Covid risk lowering, more people returning to normal – cars left unattended in public places, more travel, more collisions, insurance going up and people using telematics to help reduce the total cost of car ownership.

The CEO has previously discussed how he believes cars will not be owned by individuals in the future and more fleet management will be required to make sure those in charge of a vehicle are driving responsibly. A lot depends on whether you share the same vision.

AOB

KRO was listed on the JSE today and traded up to $45 per share – the Nasdaq listing trading currently around $32 at the time of writing this.

I do have a YT channel and not promoting that, but I would be interested to read your comments and feedback. If I've made a major miscalculation on this company, I want to learn and grow – nothing written here is intended to mislead anyone as its all publicly available information that can be checked by yourself to validate any investment decision.

Company used to pay 2% dividend whilst listed on the JSE – not sure if this will resume.

Posted to a number of subs (Trading 212, UK Investing (ISA Friendly), Investing and several other applicable areas).

submitted by /u/danjel888
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