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Why we love the Karoo(ooo)

June 19, 2024
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FinMeUp
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FinMeUp

Karooooo Ltd stock analysis

 

Firstly, lets address the ooooolephant in the room. How Karooooo got its name, as told by CEO Zak Calisto:

 

First of all, I am South African and I love the Karoo. I formed a company in Singapore, called Karoo, to hold my shares.

At that point in time, it was very important to get karoo.com. The owner of the karoo.com domain just wouldnt give it to me at a reasonable price - he was asking for a million dollars.

So, we asked ourselves: Okay, does it really make a difference whether its got Karoo with three, four or five zeros? Its just a name.

We didnt want to do a name change, so we went for Karooooo with five zeros and registered Karoo with three zeros all the way to nine zeros dot com.

All those domains belong to us, which allows people to get our name wrong and still land up at the right website.

 

About

Karooooo Ltd. is a South African found company that offers a cloud-based, smart mobility platform for connected vehicles and other assets. Its mission: To establish the leading on-the-ground operations cloud. The company is currently listed on both the JSE and Nasdaq stock exchanges, boasting over 1,600,000 active subscribers across 23 countries.

Karooooo operates a software-as-a-service (SaaS) platform that provides customers with differentiated insights and analytics to optimize their business and workforce, improve safety, monitor environmental impact, assist with regularity compliance and manage risks. 

The SaaS platform acts as a central nervous system for connected vehicles and other mobile assets, such as construction equipment, generators, refrigeration units, trailers and boats. As of February 28, 2022, the company collects an average of over 90 billion data points per month.

 

Management

Zak Calisto has been the Chief Executive Officer of Cartrack Holdings Limited since its founding in 2001. Before founding the Company, Calisto worked at a company specializing in the distribution of telematics services, from 1994 through 2001. 

It is evident that Calisto has ample experience in the industry. The real kicker? He still owns a whopping 66% of the business. Thats almost unheard of in the industry. This is super bullish from an investors point of view. 

The only potential drawdown of this is a significant decrease in the free-float of shares: For example, insiders at Karooooo own 75% of the shares, which means only 25% is available to trade in the open market. This decreases the liquidy of the share, increases the spread between buy and sell prices, and can potentially disincentivise big corporates to invest. 

 

Businesses

Karooooo operates through three subsidiaries:

  • Cartrack (100% ownership)
  • Carzuka (100% ownership)
  • Karooooo logistics (70% ownership) - Karooooo acquired Picup in September 2021, before rebranding and renaming it to Karooooo Logistics.

Although Karooooo operates various business segments, its darling subsidiary and revenue driver is Cartrack. The Cartrack offering extends beyond connected vehicles and equipment, assisting diverse enterprise customers in digitally transforming their on-the-ground operations, including systems integrations, fleet administration, field worker management, video-based safety, risk mitigation, delivery management and ESG compliance and reporting.

 

Revenue

Business segment contribution: Figure 2

  • Cartrack: 90% contribution
  • Carzuka: 6% contribution
  • Karooooo logistics: 4% contribution

Geographical segment contribution: Figure 3

  • South Africa: 77% contribution, 11% growth 2022
  • Asia, Middle East, US: 10% weight, 25% growth
  • Europe: 9% contribution, 15% growth
  • Rest of Africa: 5% contribution, 11% growth

Subscriber growth: Figure 4

  • Q1 2021: 1,134
  • Q1 2022: 1,366 (+20.4%)
  • Q1 2023: 1,543 (+13.0%)

Revenue growth: Figure 5

  • Q1 2021: R535 million
  • Q1 2022: R626 million (+17.0%)
  • Q1 2023: R801 million (+28.0%)

 

How can Karoooo keep increasing revenue?

  1. Increase sales to existing subscribers: Roll out new features to existing customers and raise the price per subscriber accordingly. With more research, development, mergers, and acquisitions, this number will start growing at a fast pace.
  2. Expand the current subscriber base: Karooooos subscriber base is growing at a very solid and consistent pace.
  3. Expand geographic presence worldwide: Although SA remains the core revenue segment, there is massive opportunity, especially in the Asia, Middle East and US segment. Q1 2023 growth stands at 25% for this region.
  4. Expand available platform and services: Acquisitions like Carzuka and Picup can further stimulate growth and expansion.

 

KEY FINANCIALS

  • Share price: 43800c
  • Market cap: R13.37B
  • 1-year return: -1.16%
  • P/E: 14.35
  • Dividend yield: 2.30%
  • Next earnings date: 14 Oct 2022

 

Overall, consistent and strong performance in both income statement and balance sheet. 

  • Healthy revenue generation, solid margins (66% gross profit, 25% operating margin), and positive net profit in the income statement.
  • Healthy balance sheet with very little debt (this is an amazing feat for a smaller company like Karooooo)
  • Sizeable (and growing) cash on hand. 

 

The rule of 40

Lets look at the company through the lens of the rule of 40, which is the principle that a software company's combined growth rate and profit margin should exceed 40%.

Karooooos revenue has compounded at 18% over the past three years, from 1.7M ZAR in 2019 to 2.7M ZAR in 2022. In FY22 KARO had an EBITDA margin of 44%. This indicates a rule of 40 of roughly 62. Even if you use free cash flow as a percentage of revenue (14%) instead of EBITDA as your profitability metric, you get a strong rule of 40 score of 32.

 

Why we love Karooooo

  1. Opportunity for geographical expansion, especially in Asia
  2. Massive Total Addressable Market (TAM)
  3. Solid subscriber and revenue growth
  4. High profitability margins
  5. Super low debt
  6. 75% inside ownership

 

FinMeUp is taking a position in Karooooo. We believe that the company will continue to deliver excellent services to its clients and strong results to its shareholders. We are taking a solid position for the long term.

 

Just a friendly reminder - This is not financial advice. Always do your own research before taking a position. Content is for informational and educational purposes only


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