Metamor Works
Karoo (Nasdaq:Karo) is a South African telematics company that is growing rapidly and increasing its return of capital to shareholders. Since then my last article, The company de-emphasized the Calzka subsidiary and refocused Caltrac’s growth in Asia. business is It has a long runway for growth, and investors should buy the stock at its current enterprise value of about $840 million.
Important KPIs:
The KPI for major companies is the number of paid members. At the time of my previous publication, the company had 88,000 customers and 1.526 million subscribers. The customers are companies like Avis, and the subscribers are each hardware unit (usually one per vehicle). In the last quarter ended February 29, 2024, we had more than 121,000 customers, increasing our subscriber base to 1,971,000. The company expects subscriber numbers for the calendar year ending February 29, 2024 to increase from 2.2 million to 2.4 million. Historically, South Africa has been responsible for the largest share of subscriber growth. Since the last update, subscribers have gone from 1.186 million to 1.443 million. Asia, the US and the Middle East are growing at a faster pace from a lower base, with subscriber numbers going from 145 million to 230,000. Management says growth in Southeast Asia represents the best medium-term opportunity for the company. The CEO responded to a question at a conference about his quadrennial subscriber doubling starting in Q2 2024: In less than four years, his subscriber base doubled. So the question is whether we will regain momentum, and we certainly have regained momentum post-corona. ” There is some evidence to suggest that growth may accelerate again. Specifically, net subscriber growth increased from 191,000 in 2023 to 254,000 in 2024. Leadership confirmed that the number of subscribers exceeded 2 million as of the end of the fiscal year in mid-May. I think subscriber growth is satisfactory, and if management can come even close to doubling subscriber numbers over the next four years, the stock should be a home run.
Manufacturers’ Efforts:
A recent conference call provided some interesting information about Caro’s relationship with automakers. During the Q3 2024 conference call, the CFO said, “Our recent partnerships with major OEMs position us to leverage our extensive offering to develop connected car ecosystems in the future, and these partnerships will continue to grow in the mid-term. We expect that this will contribute to our company’s business results.” Mr. Goy read the exact same lines in the script for the Q2 2024 earnings call. We answered the question, “Can you provide us with an update on your OEM relationships?” When will it start contributing to subscriber growth? ” Mr. Goy replied: “We have already done a lot of integration with his OEMs in Europe. We should start seeing results from these relationships in FY25.” was reconfirmed.
Financial performance, outlook and evaluation:
The financial results for 2024 are very encouraging and the outlook for 2025 is also bright. On a consolidated basis, Karooooo’s revenue grew 20% and subscription revenue grew 17%. Gross profit and operating profit increased 18%, with operating profit reaching a record high of ZAR 1 billion. Operating margins remained very high at 25% and adjusted EBITDA was ZAR 1.7 billion, accounting for 40% of revenue.
Management shared 2025 guidance of 2.2 million to 2.4 million subscribers. This would take him over 300,000 new subscribers at the halfway point, continuing to accelerate to his 131,000 in 2023 and 254,000 in 2024. The company also expects its operating profit to improve by 27% at the midpoint, with a net profit of ZAR 29.25 at the midpoint. This translates to his earnings per share of approximately $1.60.
These numbers indicate a P/E of approximately 18 at today’s stock price of $28.62 per share. This is more than a fair price for his SaaS company, which is passing the Rule of 40, accelerating subscriber growth, and looking for stock buyback opportunities.
Capital return:
February 2024, Caro Announcing an update The company announced that it will invest in a capital return program. The company announced its intention to buy back up to 1 million shares by its next annual general meeting in July 2024. This represents 10% of outstanding shares and a much higher percentage of outstanding shares. SEC rules make it difficult to carry out share buybacks, but it’s reasonable to expect the company to support its stock price if trading volume increases amid falling stock prices.
Karooooo also has a history of paying special dividends. The company paid $0.60 per share for calendar 2022 and $0.85 per share for calendar 2023. In the latest earnings press release, management confirmed that it plans to declare and pay a special dividend between May and August. Given the strong cash position, this dividend will likely be at least $1.00 per share. If this is a consistent part of a capital return plan, shareholders can expect to receive a dividend yield of over 3% on shares acquired at current prices.
Conclusion:
Since our last article, Karoooo has refocused on its core business, partnering with European OEMs to accelerate subscriber growth, return capital to shareholders, and increase technology availability. The market has ignored this development, still valuing the company’s stock at about 18 times expected earnings. Investors who want to buy high-quality shares of his SaaS company at an affordable price should buy Karooooo shares.
