How Do You Value a Telematics Business?

30th Mar '16 by Kelvin Prescott

14 comments 14921 reads

I noticed in one of the discussions on Paul's recent SCVP that there are a couple of telematics businesses on AIM at quite astonishing valuations.

Quarter (£QTX) first.

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Trakm8 (£TRAK) next

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I’m interested in part because my brother in law works for a privately held telematics business. We occasionally chat about the market, business development and the link to telecoms generally (the area I work in). His job is to find new market segments and opportunities because growth in the traditional telematics market - fleet management - has stalled.

What I couldn’t reconcile were two different perspectives.

- The market perspective, which is clearly that Telematics is a high growth, high margin business with great prospects, thus justifying valuations that are far in excess of current revenue and profitability
- The personal experience that my brother in law relayed, which is that telematics is an industry with virtually no barriers to entry, large numbers of owner managed businesses and approaching the point of saturation

Which view is wronger? (I use that phrase as I’m pretty sure that neither is wholly right or wrong)

The optimists view - value based on a high multiple of turnover

In the camp of the optimists… There are about 35 million vehicles on the road in the UK, but only a small proportion of these have tracking devices fitted to them (perhaps 5-7 millions, representing the managed fleet element of the market: hire cars, delivery vans, trucks and HGVs, specialist plant etc). Average telematics revenue per vehicle will be in the region of £10/month = £120/year. This implies a current market of £6-800m per year, but a total market potential of up to £4.2Bn

IF you take a typical software company valuation (in the region of 3 times revenue), then that means the aggregate value of all telematics businesses in the UK today might be £2-2.5Bn, and that it might grow over time to up to £12Bn.

I will leave mumbo jumbo numbering at that. Don’t want to try to create a full discounted cashflow or market analysis, as it will introduce the pretence of accuracy. I will only observe that Quartix in particular, currently valued at 8 times revenue, has an awful lot of optimism built into the price.

But, maybe the growth is really there, and maybe this justifies a high price tag?

In the camp of the pessimists... a…

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Rusty2

30th Mar '16

Re: Quartix Holdings (LON:QTX) I think are correct about valuation, forecast EPS is about +15% for next results. Re: Trakm8 Holdings (LON:TRAK) they are smaller and seem to be growing fast, forecast EPS is +110%, they have won lots of new contracts, so although the fleet market has tracking that does not stop Trakm8 Holdings (LON:TRAK) getting new contracts, not sure why but maybe their system is better? Also they have an contract in the USA I believe, so its not just UK, Tracsis (LON:TRCS) is also trying to win contracts there. Trakm8 Holdings (LON:TRAK) share price was 385p recently, so it looks better value now? PE (f) is 15, PEG 0.75

So yes I agree about Quartix Holdings (LON:QTX) but not with Trakm8 Holdings (LON:TRAK)

Disclosure I hold Tracsis (LON:TRCS) but not Quartix Holdings (LON:QTX) or Tracsis (LON:TRCS)

Sorry can't edit the above for some reason, should read Disclosure I hold Trakm8 Holdings (LON:TRAK) but not Quartix Holdings (LON:QTX), or Tracsis (LON:TRCS).

Markds28

Hi Kelvin,

Thanks for your valued insight, I also hold TRAK but only after its recent falls to a more realistic price. I brought in after listening to a management interview with Paul where the management appeared quite conservative and not over-promoting.

No doubt you are right about the market, there are lots of companies out there and presumably they are all going after each others business as the traditional customers all have a solution in place. Whether TRAK or QTX are best in class and have the solution to win business from the others and retain existing business on existing margins I would not like to say, I don't have enough knowledge of their products.

Whether I keep them long term will depend on their Revenue, GP & EPS growth. If TRAK isnt a long term winner in this market I'll be exiting

Thanks again

Kelvin Prescott

I would agree that of the two Quartix looks much more generously valued, though I don't think I would be buying either right now.

I noted that Quartix publicises the fact that it has over 200,000 trackers installed, which when combined with a rule of thumb of £100/year matches up to their reported revenue (£19.6m = roughly £100/vehicle/year).

A 3 x revenue valuation of Quartix would imply market cap of roughly £60m vs. current market cap of £160m. Feels way hot to me.

I think that Trakm8 as it stands is fully/slightly overvalued, though not a short (which is where my head is at on Quartix).

no problem.. Keep in mind that customer retention (rather than customer wins) is the key measure of managerial performance here.

Trakm8 (as with their competitors) reports customer wins all the time (at volumes of 1-2000 connections, which translates to annual revenue of only 1-200k), but is unlikely to report equivalent losses if the customer switches a year or two down the track. I was unable to find any information about retention rates on their annual reports, but I think that is the leading indicator for earnings growth.

The full years figures are at end of March, published early July probably, there may well be a trading statement soon. A lot will depend on the new contracts and the recent acquisition of Route Monkey.
I missed out of this one and only bought in at 210p then sold at 272p then bought back at 205p. I will hold until the trading statement or full results and then decide.

rhomboid1

The route monkey acquisition was so odd looking that I crossed Trakm8 Holdings (LON:TRAK) off my watch list , the CEO in a presentation/discussion tried to explain it but I found the explanation less convincing than I'd want it to be.

The Telematics sector seems to be a bit of a mixed bag , I recall Quindell weaving all kind of nonsense dreams around what is a product that most drivers dislike and thus have to be forced to have in their vehicle.

I quite liked Trakm8 Holdings (LON:TRAK) but the sector whiffs a bit to me, it seems that customer churn is a major problem is also an issue as Kelvin suggests above.

apad

Went for QTX rather than TRAK.
Easy to understand vs difficult to understand.
Organic vs acquisition.
Fleet market retention at QTX is 10%.
Sales competence equals success.
Software added value to back office functions is key to retention.
Back the management.
Valuation is difficult.
Good fun.
apad

ps
Customer retention presented in great detail including year of customer acquisition.
Check out presentation on website KP :-)

31st Mar '16

Thanks! just read through it now. Fleet attrition of 11% is pretty good in this market. Good luck!

chilligg

12th Jul '16

Hi kevin,

Just digging around and saw your comments. Re QTX, if you check the website, the company estimates the commercial vehicle market in the UK c3.5m of which 3m are light vehicles suitable for the technology. Of this a third already have telematics, giving QTX c12% share of the current market with 62.6k units, and c4% of the potential market. From a simple calculation of rev/units, their annual sub is around 175 pounds. The Insurance business is very different and volatile due to the one off nature of the annual contract linked to an insurance policy, but it is worth noting that their partner Wunelli is part of Relx (the old ReedElsevier group) , one of the largest data providers globally. This may give them an edge on the global insurance stage looking outside the UK. The shares look pricey today, but may not actually be as pricey as they look - Free cash flow after investment and expensing 1m of R&D was 5.4m last year, giving a FCF yield of 3.3%- if they grow that double digit, maybe it isn't a bad proposition, but that isn't a forecast. As always DYOR.

VegPatch

8th Aug '16

I am late to this discussion, only just having looked into Trackm8 (£TRAK) after hearing an interview with David Stredder who seems to have a great nose for smaller companies.

My initial observation is that Trackm8 capitalises all its development costs, amounting to £1.85m in FY16, or 50% of operating profit. I always get nervous with software companies on revenue recognition and capitalisation of development spend. So to be more conservative I think you need to seriously consider taking these capitalised development costs and putting them through the P&L. I know this is not the accepted accounting convention, but I do think it is more conservative.

EPS would then fall in FY16 from 13p underlying to around 6.5p. Suddenly the valuation doesnt look so exciting. I think Kelvin has come up with a really balanced set of views, which is to be applauded.

Having said that the company admits that 1) it put a lot of development cost into FY16, so one could imagine that capitalised development costs may actually fall in 2017. 2) in the first 2 months orders were up 57% yoy, of which 44% is organic. 3) overall costs are forecast by the company to rise less fast than revenues in FY17.

So whether you take my conservative accounting methodology or not, earnings look to have a high chance of rising at a pretty rapid rate. And the company is saying it expects gross margins to rise over time. So maybe the 6.5p of cash EPS in FY16 becomes something like 10p in FY17 ? Just a guesstimate.

Overall I think you need to be careful when looking at P&L earnings but I think the valuation is probably just about ok if i looked at it on a cash PE basis.

Any thoughts as to why the shares have been a bit of a dog given 1) more reasonable valuation 2) good start to the years orders and 3) ok balance sheet. ?

29th Nov '16

this was a good discussion posted by Kelvin Prescott on telematics with some interesting thoughts provided by his brother in law on how telematics is a commoditised business, compared to how the market viewed it as good growth. Chapeau to Kelvin in light of yesterday's Trakm8 warning.

AnonymousUser226237

19th Nov '17

So much changed within a year, Trakm8 now is the clear winner after spending a year spending cash on R&D and coming out with some of the best products in the global market. The 4G HD telematics cameras, the new Car Genie device, Trakm8Prime etc. A single product with 4G connection, HD camera, advanced telematics, vehicle health diagnostics as well as route optimisation...all in one, with IP on hardware/software owned end-to-end by Trakm8.

On the other hand, QTX is losing customers to Trakm8 Holdings (LON:TRAK) (Calor Gas) and seems to have slowed down on both sales and profits recently. Its products are very outdated (not even plug and play, require fitter) and since their clients are not tied with lengthy contracts, a quick look around on what's available on the market would result in many of them taking their business elsewhere in my opinion.

For those still interested in the telematics sector which I think will be one of the hottest in 2018, you can check my 2 articles on TRAK:

Trakm8's turning point and what lies ahead
https://www.stockopedia.com/co...

Trakm8 gearing up for the future
https://www.stockopedia.com/co...

How Do You Value a Telematics Business?

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Kelvin Prescott

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