metamorworks
Karooooo (NASDAQ:KARO) is a South African telematics company that is growing rapidly and increasingly returning capital to shareholders. Since my last article, the firm has de-emphasized its Carzuka subsidiary and re-focused on Cartrack growth in Asia. The business has a long runway for growth and investors should buy stock at the current enterprise value of ~$840M USD.
Critical KPIs:
The main company KPI is the number of paying subscribers. At the time of my prior publication, the company had 88,000 customers and 1.526M subscribers. A customer is an enterprise like Avis, a subscriber is each hardware unit, typically one per vehicle. In the last quarter ending 2/29/2024 there were more than 121,000 customers with the subscriber base increasing to 1.971M. For the calendar year ending 2/29/24 the firm is expecting subscribers between 2.2M and 2.4M. Historically, South Africa has been responsible for the lion’s share of subscriber growth, going from 1.186M subscribers to 1.443M subscribers since my last update. Asia, the US, and the Middle East are growing at a faster rate from a lower base, going from 0.145M subscribers to 0.230M subscribers. Management has stated that growth in Southeast Asia is the best medium-term opportunity for the company. The CEO responded to a question on the Q2-24 conference all about doubling subscribers every four years, “Currently, we’re growing slightly slower than we did in those years… We certainly are getting momentum, and our intention is to grow to more than double our subscriber base in less than four years. So, it’s just a question of us getting our momentum back, which we certainly are getting it post-COVID.” There is some evidence to suggest growth can reaccelerate. Specifically, net subscriber additions went from 191K in 2023 to 254K in 2024. The leadership confirmed that subscribers have passed 2M as of the earnings date in mid-May. I regard subscriber growth as satisfactory, and if management can even come close to doubling subscribers over the next four years, the stock should be a home run.
Manufacturer Initiative:
There have been intriguing tidbits in recent conference calls about Karo’s relationship with auto manufacturers. In the Q3 2024 call, the CFO stated, “With our recent partnership with leading OEMs, we are poised to leverage our extensive offerings to future develop the connected vehicle ecosystem and expect these partnerships to contribute to our results in medium term.” Goy also read this exact same line off the script for the Q2 2024 earnings call. In response to the question, “Can you provide an update on the OEM relationships? When could it start to contribute to subscriber additions?” Goy replied, “We have done a lot of integrations already with the European OEMs. We should be able to start seeing fruits from these relationships in FY ’25.” This exciting initiative was re-confirmed on the Q4-24 conference call.
Financial Results, Outlook, and Valuation:
2024 financial results were extremely encouraging, and the 2025 outlook is strong. On a consolidated basis, Karooooo grew revenue by 20% and subscription revenue by 17%. Gross profit and operating profit grew 18%, to the best ever operating profit of 1B ZAR. Operating profit margins remained extremely high at 25% and adj. EBITDA of 1.7B was 40% of revenue.
Management shared 2025 guidance of 2.2M – 2.4M subscribers. That would be more than 300k new subscribers at the midpoint, continued acceleration vs 131K in 2023 and 254K in 2024. The company also expects operating profit to improve to 27% at the midpoint and to achieve net income of 29.25 ZAR at the midpoint. That equates to about $1.60 USD in earnings per share.
These figures imply a P/E of ~18 at today’s price of $28.62/share. This is beyond a fair price to pay for a SaaS company that passes the rule of 40, is accelerating subscriber additions, and is looking for an opportunity to buy back shares.
Capital Return:
In February of 2024, Karo announced an update to its capital return program. The company announced its intention to repurchase up to 1M shares before its next annual general meeting in July 2024. This represents 10% of shares outstanding but a MUCH higher percentage of the float. It is challenging to implement this buyback because of SEC rules, but if there were an event where volume picked up as the share price was declining, it would be reasonable to expect the company to support the share price.
Karooooo also has a history of paying special dividends. The firm paid $.60/share in calendar 2022 and $0.85/share in calendar 2023. In the most recent earnings press release, management confirmed that they expect to declare and pay a special dividend in the May – August timeframe. Given the strong cash position, this dividend will probably be at least $1.00/share. If this is a consistent part of the capital return plan, shareholders can expect to get a 3%+ dividend yield on any shares acquired at the current price.
Conclusion:
Since my last article, Karooooo has refocused on the core business, accelerated subscriber growth, returned capital to shareholders, and partnered with European OEMs to increase their technologies availability. The market has ignored this progress and still prices the firm’s equity at about 18x forward earnings. Investors who want to buy shares in a high-quality SaaS company at a reasonable price should pick up shares in Karooooo.
