THE BOTTOM LINE
Why hold back on Cartrack? No cause for market cynicism
It's growing fast, churning cash, and expanding rapidly into international markets. Time for a break
Over the past five months Cartrack has decelerated from its end-February high of R21.45. On Tuesday the share briefly dipped under R14 before revving back up to R16.75. The market rating, however, still remains modest for such a fast growing and cash generative contender – the share price reflecting a trailing earnings multiple of around 16.7 times and offering a fair yield of 2.75%.Over the past five years, the vehicle tracking and fleet management specialist has managed an enviable compound five-year subscriber base growth of 21% and compound five-year subscription revenue growth of 26%. More reassuring, annuity income makes up 88% of total revenue. Cash conversion has been good, while product development and innovation have also been impressive.
Why then is there even the slightest bit of trepidation in the market? Possibly, the overriding cynicism in the market around small- to mid-cap companies has got investors interrogating every line in the recently released annual report.
If there is anything to rattle shareholders it might be the statement in the CFO’s report that Cartrack plans to invest more heavily in research and development, data analytical skills and distribution channels to expand and grow the subscriber base significantly. The increased sales are expected to comprise mainly rental contracts which will require funding. In short, the group’s strong operating cash flows will be reinvested at an increasing rate.
That has prompted a revisiting of the dividend policy for financial 2019 to a target cover of between two and four times headline earnings compared to the previous metric of 1.25 and 2.5 times. Possibly, punters able to live with Cartrack’s stingier payout policy might lock into a markedly bigger payout number in the longer term.