Great points @Rocket6. I’m not bearish on Smart Parking. I’ve had it on my watchlist for a while now and I was hoping to take a nibble around 30cps before it quickly bounced up to 43cps just before the announcement. NPAT came in lower than I expected for 1H24 , but that’s just one half where more earnings were directed to growth, and I can see the potential for NPAT to grow quickly from here. I’m hoping to add a small holding of Smart Parking between 30cps and 35cps also, but even at the current share price it doesn’t look overly expensive. Smart Parking has a great runway for growth and I can see ROE of 25% not too far out from here. I’m just waiting for a pull back in the share price, but that might be wishful thinking! :)

@Rocket6 excellent points. To be honest, I wish I'd had the wit to take a position in the depths of the pandemic when $SPZ was hammered.

I'll put my hand up and say that my remarks on the results were based off superficial analysis, and the discussion on this forum has pushed me to undertake a deeper dive. So thanks all round! It was timely to also review the recording of the @Strawman Meeting over the weekend, as I couldn't make the meeting live due to attending result calls of some of my core holdings.

I learned a few things (which you and others already know, clearly, from your comments):

• Looking at new sites (organic and inorganic) added from 2020-2023, average investment per site is about $20k (95% PPE + acquisition of subs).
• Portfolio average revenue/site is $40-45k/yr, consistent with CEO Paul's comment about payback in 6-9 months. (David Williams of $PNV would call those economics "working capital") So we actually are taling about a reasonably capital light business.

So, @Wini was quite right to jump on my negative comment about seeing weak operating leverage. I am still working through the operating economics, and trying to understand how much of the expanding opex base can be attributed to scaling Germany, standing up Denmark, and some perhaps temproarily stranded costs in QLD. I was also a bit spooked by the large amount of the Opex which sits in "Other Expenses" although these are broken out in detail in the notes of the accounts.

Paul's remarks about private equity deals, with EBITDA multiples of 11-18 (I think) also got my attention. If you take FY24 EBITDA of c.$11m, that makes a valuation of $120-200m or $0.35 - 0.$57 /share. I'm not saying I'd buy it for its M&A potential, but having those mutiples in the market tends to help put a floor under the SP. So, downside risk is low.

Like you and @Rick, I am a buy below $0.35, but I want to complete my analysis to challenge myself as to whether this is unduly conservative. For example, if the pace of NZ continues, if Den has a trajectory like NZ and with better operating economics, then even if Ger remains a slower burn, then the valuation looks compelling around current levels.

The @Strawman Meeting was very timely, and I am also pretty impressed with the management team. For example, the candour with which Paul was open about UK learnings (e.g., the Asda deal and the risk of large accounts, with sophisticaed customers looking to extract value from all their assets.)

So, a little more work for me to do. But in any event, if I get the chance below $0.35, I'll be in.

Disc: Not held. At the top of my watch list.

@Rocket6 Great post, only thing I will clarify is in their site numbers SPZ only include ANPR sites, I believe all of the ParkInnovation sites acquires were manual.

@mikebrisy and @Byrnesty, I think focusing too hard on operating leverage at the group level is potentially missing the forest for the trees with SPZ. Given the business model of upfront capex and then exceptionally high margin, high cash generative returns after that, it means SPZ management are absolutely doing the correct thing to continue to invest in new geographies, make smart M&A and drive new site wins as much as possible.

90%+ incremental gross margins says it all really, I think as long as you are confident management are investing smartly below that to not dilute the unit economics currently being achieved you have to accept at a group level you won't see the benefits of scale for some time.

There aren't too many other examples I can think of on the ASX but I have compared SPZ to SMP which has similar unit economics once they wear the upfront CAC on getting a terminal to a customer. The key difference is SMP has a limited addressable market focused on ANZ so you saw group scale come through much quicker. Listening to Paul on the call today SPZ are not short of new geographies to expand into so I expect we will see continued growth in opex for now. That said, they break out geographies cleanly so you can monitor each over time. So far NZ has been a stellar example of how quick scale can emerge with the business model, Germany taking a bit longer (perhaps some industry/cultural stuff to adjust to, or just the sheer size requires more upfront investment in the team and processes) and let's wait and see how Denmark shapes up but the characteristics as Paul outlined sounded as if they can hit the ground running.

@mikebrisy I’ve been sitting on the sidelines too watching NPAT. When businesses become profitable this is my preferred metric to follow.

I don’t understand the business well enough to make too many comments. However, based on reported NPAT versus consensus, it would appear SPZ is unlikely to meet analyst forecasts for FY24 (1.9 cps, Commsec data). Today SPZ announced NPAT of $2.2 million for 1H24 and with 349 million shares thats 0.63 cps for the half. On its current trajectory it seems unlikely SPZ will achieve analyst consensus, or even match FY23 NPAT (1.8 cps). I haven’t researched SPZ well enough for this to hold much weight. SPZ is still in the early stages of profitability and you could expect NPAT to be choppy.

Not held

@mikebrisy Also, I agree with your point on the free cash flow. I have quizzed them in the past and they have said that essentially all of their capex is growth and going towards new site installations. The cameras and signage have extremely long fixed lives (amortised over 5-7 years but in reality last over a decade) so once they are installed there is no maintenance capex required. If a camera needs a repair (usually due to vandalism), the cost of the technician is expensed.

Nonetheless I have said they should still break out whatever maintenance capex there is. Even the basic stuff like replacing office furniture, computers, etc. I wish more companies would break out the maintenance/growth split and I do believe SPZ management when they say most of theirs is growth, but they take it too far to exclude all of it.

@Wini on operating leverage, I guess my reticence is that I don't understand in practice what the hardware lifecycle looks like. The cameras are amortised over 5 years and the pay and display equipment is over 7 years. But that's just accounting. So you are right, in that my comment on wanting to see stronger operating leverage is that I have made the simplifying assumption that the D&A rate is representative of an ongoing business. If there is a long tail of revenue after the hardware is fully depreciated, and if the maintenace cost is minimal, than you are right, as a business that is not entirely capital light, they wont show strong operating leverage early on.

However, if $SPZ is going to grow for a long time, then it is probably a good assumption that they are going to carry a high D&A rate for the foreseeable future.

On the free cash flow, I have to put my hand up and say I use a different definition to that which is commonly used. I was trained in DCF methdology using Copeland, Koller and Murrin, who define FCF as "after-tax operating earnings, plus noncash charges, less investment in operating working capital, PPE and other assets". So the way I estimate it is to look at the Cash Flow Statement and take OpCF and deduct non-financial investments from InvCF and deduct Lease Payments from FinCF.

The reason I do this, is that 1) in many companies it is hard to discern growth capex from sustenance capex, 2) I only invest in growth companies, so my definition of FCF is the basis for my valuations. The only item I hold outside FCF is the capital structure/financing flows. So, FCF helps me understand whether a firm can self-fund its strategy.

On 1) above, this is particularly the case with software companies. I always fully account for cash investments in intangibles, because there is practically no way of discerning investment in maintaining a software platform from growing functionality. I form a judgement on the long term trend in investment as a % of revenue, and assume that this is part of the continuing economics of the business. Innovate or die!

Acquisition of business - as an investment in assets - is trickier. Some firms, like rollups that continually buy other assets, then this is analogous to any other investing cashflow. However, more lumpy acquisitions, are another story, and I like to look at these separately

The point of this discussion is worthwhile. FCF in a non-GAAP measure, and there are lots of different treatments of it. So it is important to be clear about what we mean.

@mikebrisy Great conversation!

On FCF, I try to take a more ownership mindset that says "after I have invested the cash required to keep the business running at it's current steady state, what is left over?" In a nutshell that would be something like OCF-leases-maintenance capex, but I completely agree with your point "1) in many companies it is hard to discern growth capex from sustenance capex". For SPZ in particular it is easier than most, you have existing sites and new sites so the distinction is there. Completely agree though that for many other businesses you need to run to stand still so what seems like growth capex is just keeping up with your competitors and customer demands.

On the operating leverage, sorry I may not have came across as intended. Your point on the hardware cycle is legitimate and we can only estimate really. Some older UK sites would now be coming up towards the time where you would expect to see hardware repairs/improvements, but we haven't seen elevated capex yet (in fact this half is one of the lowest for some time). It is also complicated that some "capex" in that sense goes through the expense line through repairs rather than hardware replacements.

More what I was trying to get at is when you look at a group profitability level, operating leverage is muddied by new geographies that haven't hit scale yet. As an example, in this current report EBIT increased 26% year on year by $700k from $2.8m to $3.5m. However, the UK segment increased it's EBIT by $1m, with the remaining segments (and corporate overheads) being a drag at a group level. So we know the business model at scale can show great leverage based on the UK example, the question is if we aren't seeing it at the group level because management are "investing" in Germany, Australia, New Zealand and now Denmark (investing in inverted commas because it's the nice way to say wearing operating losses), can those geographies reach scale and show the operating leverage inherent to the business model? There are a lot of factors to that question, primarily regulatory environment and current penetration of ANPR to manual compliance, but that is where you have to trust management and the board are allocating capital well.

For what it's worth, I think Germany is taking longer than I and management expected with the operating loss increasing this half. Given the size of the market I can understand why management would persist but when we talk about profitability and leverage I would view it through the capital allocation lens rather than the business model itself.

On the free cash flow, I have to put my hand up and say I use a different definition to that which is commonly used. I was trained in DCF methdology using Copeland, Koller and Murrin, who define FCF as "after-tax operating earnings, plus noncash charges, less investment in operating working capital, PPE and other assets". So the way I estimate it is to look at the Cash Flow Statement and take OpCF and deduct non-financial investments from InvCF and deduct Lease Payments from FinCF.

The reason I do this, is that 1) in many companies it is hard to discern growth capex from sustenance capex, 2) I only invest in growth companies, so my definition of FCF is the basis for my valuations. The only item I hold outside FCF is the capital structure/financing flows. So, FCF helps me understand whether a firm can self-fund its strategy.

Maybe I don't quite understand what you are saying here, but if your estimate of FCF has growth capex deducted then most growing companies will look as though they cannot self-fund the growth.

@UlladullaDave correct. I want the FCF profile over time to tell me what the funding requirement is. So a company with a positive FCF profile is growing while throwing off excess cash, which can either pay down debt or be returned in dividends.

A company with a -ve profile is drawing down its reserves and/ory requiring debt or equity funding. It is the ultimate measure that, as an investor, I want to track.

The other definition of FCF is essentially OpCF less maintenance capex. So, in that case, it tells you how much cash you have either to reinvest in the business for growth or to return to investors or pay down debt.

The point is to be clear what measure you are using, which is why I clarified because @Wini and I were using different definitions.

I want the FCF profile over time to tell me what the funding requirement is. So a company with a positive FCF profile is growing while throwing off excess cash, which can either pay down debt or be returned in dividends.

Thanks @mikebrisy , I understand now. Seems like it would be quite difficult to bang out a DCF without some understanding the growth capex (incremental ROIC, estimated growth rates etc) profile of the business.

Seems like a general trend of Capex investing and depreciation becoming a headwind with these "imaging" stocks such as Smart parking, AMX, SP3 and maybe ACE.

Currently considering my holding here.

Great thread.

Just chiming in to say that we've managed to line up a chat with the Smart Parking CEO this Friday. Will be good to get a clearer picture of things.

My hot take on today’s results

Those holding with a 6 months mindset ; unhappy, wanted more rev to drop to NPAT line.

Those holding with a 3 year mindset; happy, good result, investing in growth reasonably, thesis on track. 

Lots of respect for everyone in this thread. @mikebrisy @Wini ; thanks for the hard work you do lads. Makes the price of my membership a bargain.

Probably would be good to ask about the competitive landscape within Europe at the meeting.

I already found one private company within Europe doing almost carbon copy of Smart Parking.

Looks slick:

Changes things doesn't it?

Apologies for being cryptic but personal time is limited right now.

100% agree with this @Wini . The return on investment on new sites has traditionally been very good and very happy for profits to be pushed out into the future whilst they continue to participate in the land grab which sees automation replace humans in parking

When the competition in Europe rhymes with a famous Marvel character (Peter Parker) and boasts impressive clientele I got nervous. didn't want my money parked in a german growth project with competition like that.

I couldn't get the funding data but Peter Parking had many funding rounds.

Hoping someone can look a bit more here.

Plus the massaging of Capex /FCF figures

Meantime best of luck for holders.

They put this in the deck, was there any discussion around the sort of multiples being paid by PE?

@UlladullaDave the two transactions were for Intelli-Park back in October last year and Horizon Parking in January. Only the Intelli-Park valuation was disclosed ($231m AUD on 3.3x revenue and 11.7x EBITDA) and they had ~2000 sites under management so slightly bigger than SPZ at ~1200.

Horizon had ~3000 sites so would be nice to see it disclosed at some point being one of the larger purchases in the space since Macquarie bought ParkingEye.

Thanks @Wini.

For those wondering why share price has recovered, Cannacord has upgraded the price target from 45c to 50c

I probably got out a bit too early but 1c here or there does not matter.

Also for those that need a refresher here are some Uni slides on free cash flow

As mentioned in previous posts, Smart Parking appears to have something called Growth Capex. The standard CapEx definition is below.

Unless I've missed something, where does Growth CapEx fit into this definition?

It is part of CapEx.

Sorry I should have been clearer, @mikebrisy

I should have asked when Growth Capex gets excluded from the standard definition.

Probably more a question for Smart parking which I hope they will answer

@edgescape , no worries.

Interesting today in the $WTC result, they quoted FCF where they included the "organic" capex (PPE and capitalised development) and omitted the "inorganic" investment in the small Matchbox and Sistemas acquisitions. Of course, both are investments aimed at building the capability of the platform, so from an economic perspective they are indistinguable ("make or buy").

So, every time someone uses FCF, because its non-GAAP, they really do need to give the specific definition they are using. Otherwise it is disrespectful of the audience, because we have figure out what it is by going through all the premutations and combinations.