SPZ: Leaving the meter running

If we look hard enough, we can find good little profitable businesses who appear to be on a strong growth trajectory, however if they are cash flow positive and are growing revenues at the same time, then they carry less funding risk than many ‘stories’ on the ASX. Further, if they ever need to raise capital then it is likely for ‘expansion’, rather than ‘survival’.

Once you identify a business like this, what then becomes important is whether the business can execute on its potential. One of the supporting points I often look for is whether the leaders of a business have demonstrable evidence of delivering on business growth in the past.

It is through this lens that today we look at Smart Parking (ASX:SPZ) who are a real minnow on our market, however they have big plans ahead and despite their size are generating positive cash flow.

As the name may suggest, SPZ are involved with managing car parking spaces virtually through what is known as Automatic Number Plate Recognition (ANPR) - also known as License Plate Recognition (LPR).

The company operates in the United Kingdom, New Zealand, Australia (Queensland) and most recently, it obtained operations in Germany. The company currently manages 1,112 sites across the world, which was a 33% net increase on the previous year.

Source: Annual result presentation

The majority of the company’s revenue is made up of Parking Breach Notices (PBN), some 83% according to the company. The other major contributor is the Technology division which sells the company’s proprietary technology and hardware to external customers, plus internal ones.

The expected revenue formula is quite formulaic. The company has disclosed that on average, 0.4% of all parkers are in contravention per site, which results in 600 - 800 PBN’s per year per site, making this a scale game. The more sites SPZ operates, the more revenue they make. Also as SPZ embeds its technology deep into the parking sites, there is very little churn in customers (less than 5%) meaning much of the revenue is recurring.

As can be seen in the image above, the majority of the company's revenues currently come from the UK. In percentage terms it works out to be close to 90%. Europe and the UK is the company’s expected growth engine - More on that in a moment.

StockRank

From a StockRank perspective the company has a strong balance across all key factors,in particular Quality and Momentum. Post March 2021, the company has maintained a relatively strong overall score (above 70). COVID hit the company quite harshly and therefore one needs to look through that to get a better picture of long term performance.

Breaking the overall score down, Quality ranks highly at 97 on account of all metrics, ROE, ROCE, Operating Margin, Piotroski score, Altman score and Beneish M score, being in very good shape.

It has grown net profit by over 30% CAGR over the past five years. Likewise operating cash flow has risen 25.7% CAGR over five years. What is most pleasing however, is that Free Cash Flow (which accounts for outflows used to maintain its capital assets) has been positive since 2021.

Momentum ranks a 99 for the company driven by a few different aspects. First are the strong relative price performances that see the company trade close to 52 week highs, whilst moving in a strong north-easterly direction over the year.

When looking at the chart from a support/resistance level perspective, short term support can be found at 30 cents, for those wanting to allow the price a bit more space to breathe, 26 cents would be a more appropriate level. Going back to 2019, that level was resistance that was tested in 2021 and 2022, until where it was clearly breached in July this year, thus turning into a support level.

ASX:SPZ 1 year Daily chart

I will caveat these comments by reminding investors that the stock is very small (approx $120M Mkt Cap) and can often have days of no, to little trade. This makes using charts particularly difficult and therefore fundamental reasons should play a strong role in determining your preference for this business.

The other aspect which affects Momentum is how analysts perceive the stock. Pleasingly there have been upgrades over both a 1 month and 3 month basis for both FY24 and FY25 estimates.

This has seen a general increase in perception of the stock moving it closer to a ‘strong buy’ from a ‘buy’.

There are few things to note however. The first is that only two brokers cover the stock, which is unsurprising given its size. The second is that on the back of the recent run, the price is closer to the consensus price target than previous. Therefore the company will need to continue to grow to see further re-rates into the future.

This leads into the Value factor which is the weakest of all three. At 45 it is suggesting that investors are paying a fair to elevated price to participate in the company’s future.

While PE and EV/EBITDA to the industry look favourable (ie Green Bars), when considered against the broader market it is not dirt cheap. It is also unsurprising that price relative to tangible measures is unfavourable as the majority of its value is in IP and agreements. Further, another drag is the fact the company pays no dividend, as they have decided to reinvest cash to fund growth.

Interestingly despite its size, the company actually bought back some $800,000 of shares on market in FY23 at an average price of $0.23 - this would appear to be a shrewd decision given the current price. The program was cancelled in May with funds channelled elsewhere into the business.

It certainly is great to see that the business is focused on self-funding growth as much as it can with a slight decline in shares on issue over the past five years.

Management

One of the key reasons SPZ peaked my interest was because of the Chairman and major shareholder, Mr Chris Morris.

Mr Morris was the founder of ComputerShare (CPU) and effectively created a global business successfully guiding the company through that expansion until his retirement from the Board in 2015 to focus more on his other ventures. This included SPZ that he was appointed Chairman for back in 2009.

He currently owns some 34% of the business with a solid history of buying more stock, both before and after COVID.

Outlook

Now that we have had the opportunity to review the solid performance, it is time to discuss the outlook and the potential for this stock. On my first read there is a significant amount to get excited about.

As discussed the company is focused on expanding more into Europe, not just in the UK but also into Germany.

If you visit one of the images shared at the beginning of this analysis and taken from the annual result presentation, you will see the total addressable market (TAM) for the UK is 45,000 sites, whereas for Germany it is 90,000. Currently SPZ has 2% penetration into the UK, and a negligible amount in Germany. Further, when you look at the vast majority of current sites, most remain manned (particularly in Germany >95%) and therefore the potential for technology solutions in the sector is massive.

The company has earmarked that it believes it can grow its global exposure from the current count of 1,112 to 1,500 by June 2025 (+35%). The company has $10M in cash which it is keen to use to fund acquisitions. Most recently it was to purchase the German company ParkInnovation for $2M which handed over 46 manually run sites that it will look to convert into ANPR sites. Further, about 22% of the region's regulated parking spaces reside there. So if they get this expansion right, the potential for some big wins awaits.

Further the paid parking segment is highly fragmented, particularly in the UK and Germany. SPZ typically acquires small parking operators (including 3 in the past five years) to accelerate its site expansion strategy.Therefore the possibility for more acquisitions to add to the bottom line remains in play. And according to the company, it doesn’t cost much to get started. In fact they estimate it costs $25k to set up a new site. Given they made about $42,000 from each site last year, their costs are repaid in little over 6 months.

Risks

All companies carry risks, and in the case of SPZ, it is crucial you understand them before considering an investment into the business, as they simply cannot be ignored. On top of the patchy liquidity and lack of analyst coverage, the major risks to SPZ are:

Changes to the UK Parking (Code of Practise) Act

Currently it is legislated that current industry parking charge level is £100, with a 40% discount

rate for early payment, alongside a £70 cap on debt recovery fees. However this has been a political football for over a year now with subsequent revisions made along the way. A number of options are up for discussion and the one with the biggest potential impact to SPZ is where the PBN discount is increased from 40% to 50%. While not disastrous, as the UK is the largest revenue generator, it will have some impact.

Changes to Queensland legislation

At the start of the year, the QLD government stated it wanted to crack down on what it saw as predatory fines issuance by private car park operators. In short the QLD government put a halt to accessing data from the Motor Vehicle Registry. This has meant that the company has paused ANPR activities at the 71 QLD sites until this gets sought out (some sites are run manually). The company has basically written the business off for the moment.It only generates $1.4M in revenue and is losing -$0.4 in EBITDA. They have already reduced costs and staff and they said in their annual report that $0.9m in plant and equipment can be redeployed in other jurisdictions.

Access to government records

As highlighted by the Queensland example, SPZ is beholden to having access to driver information so as to prove the infringement was made and ultimately to have someone to take to court if they need to. If there was a change by governments to block this information, it would have a significant impact on SPZ. The Australian example will likely not have a big impact as the restriction to the Motor Vehicle Registry was done while the Australian division was a loss making entity. However, should the same occur in the UK or Germany the impact will be far more severe.

Conclusion

Despite the above risks, SPZ is a capital light business with a potentially big runway of growth ahead of it. Its lack of liquidity and small size means investors considering the stock will likely only be able to take a small position as they will likely be parked there for quite some time. If they do invest they must form a long term perspective on the company’s prospects.

Headed by IT sector royalty, the pedigree is there, along with the underlying thematic of the digitisation of everything. But ultimately SPK will be as successful as the sales team are. As each site is low cost, with quick repayment periods and sticky clients, then to put it simply, the bigger SPZ can grow its network, the more money it will make. ASsuming the government doesn’t pull the rug from under it.

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