by Jan Schalkwijk, CFA
In a recent article I wrote about the tech sector in Africa, I mentioned a South Africa company called MiX Telematics Ltd (NYSE:MIXT). There is a dearth of investable tech names in Africa and the worry is that investors would have to stretch to gain exposure to African tech. With this company, no stretching is necessary and it thus provides exposure to the African technology sector without comprising on value or quality.
MiX Telematics is a company that provides fleet and mobile asset management solutions, delivered through the Software-as-a-Service “SaaS” model. The company seeks to deliver its fleet operator customers improved efficiency, safety, and security. The core technology is real-time vehicle tracking and a software platform to record, interpret, and act on the data. This is what the company offers in a nutshell:
Efficiency: manage poor driver behavior, improve route efficiency and maximize vehicle utilization. The improved efficiency results in fuel savings, reduce wear & tear, faster delivery, and minimal vehicle downtime.
Safety: human error is to blame for 80% of motor vehicle accidents. The company’s vehicle/driver tracking and monitoring system can record, analyze, and correct poor driver behavior, thus improving fleet safety. In South Africa, the company also has consumer solutions for insurance approval, roadside assistance, crash alert, and business mileage tracking.
Security: Vehicle tracking and monitoring allows for the recovery of stolen vehicles, the monitoring of precious cargo, and alerts to the driver of possible dangers or suspicious vehicle behavior. On the latter point, if for example your car is close to the South African border, MIXT will call you to make sure you are still in possession of your car and it is not on its unauthorized way out of the country.
The company has over 1,000 employees across offices in South Africa, Uganda, UAE, US, UK, Brazil, and Australia, managing over 0.5 million mobile assets and a network of 130 fleet partners. The company’s shares trade on the Johannesburg Stock Exchange and on the NYSE since July 2013 through an IPO that raised the equivalent of 650 million South African rand (650 Rm) gross of fees.
Two thirds of the company’s 2014 revenue of 1,272 Rm were subscription revenues, which produce an annuity-like stream of income. It is very much the strategy of the company to grow through increasing the number of subscriptions, rather than the off-the-shelf sale of hardware/software. Today, half of its revenue and 2/3s of its employees are Africa based. The percentage of revenue from Africa is likely to decline as the company’s foothold in Brazil and the US expands.
While overall revenue was flat in 2014 in dollar terms (up 8% in rand terms), its revenue from subscriptions increased 8% in dollar terms, which will be a key metric to follow. As the mix shifts towards subscriptions, margins improve, which benefits the bottom line even if overall growth is slow. Using CY 2015 Street estimates, the company is trading at an Enterprise Value to Revenue multiple of 1.4x, this compares to 5.2x for the SaaS industry as a whole and 5.6x its closest competitor Fleetmatics (NYSE:FLTX) in the UK. Also – refreshing for a SaaS company – MIXT consistently generates free cash flow.
Even if the market does not narrow the valuation gap, there is a reasonable chance that a corporate buyer might step in. On June 18th US-based Novatel (NASDAQ:MIFI) announced it was buying Digicore, another (smaller) South African fleet-management and vehicle tracking firm, for $87 million in cash, or 4.40 rand per share. On June 1, prior to the announcement, shares were trading around 2.6 rand. MIXT would cost a little more to acquire, but it is digestible with a market cap of $250m.
On the business side, one of the key metrics to look at is renewal rates. There are other players in the space and therefore a declining renewal rate is an indicator of a deteriorating competitive position. The most recent figure for that metric is 90%, which shows that customers when evaluation SaaS solutions available, have a high rate of resigning with MIXT. This speaks to their technology being world class.
Does this company fit in an Africa fund? The answer is a resounding yes, in my view. If we are investing in the African domestic economies we should not limit our universe to African companies with local ambitions, but also consider Africa-domiciled companies with global ambitions. Such an investment can often prove rewarding, as it enables an investor to buy a world class company that’s trading with an Africa discount. Moreover, you are banking on the growth of the African middle class in much the same way as when you are buying a bank or a consumer company, because companies like MIXT grow the middle class income that fuels banking and consumption.
Jan Schalkwijk, CFA has 18 years of experience in the investment industry. He is the founder and Chief Investment Manager of JPS Global Investments, an investment firm specializing in green investing on a global basis, and serves on the portfolio management team of Africa Capital Group, where he co-manages a sub-Saharan Africa strategy. From 1997 – 2005, Jan worked at Franklin Templeton Investments, where he was vice president of investment platforms. There, he was responsible for a book of business of $10 billion in assets under management and raised institutional assets in various sub-advised investment mandates that the firm offered, including domestic and international equity and fixed income.